Indonesia: Shipping Report

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com
Q1 2012
inDonesiA
shipping Report
INCLUDES BMI'S FORECASTS
ISSN 2040-9745
Published by Business Monitor International Ltd.
INDONESIA SHIPPING REPORT Q1 2012

INCLUDES 5-YEAR FORECASTS TO 2016
Part of BMI's Industry Report & Forecasts Series

Published by: Business Monitor International Copy deadline: December 2011
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Indonesia Shipping Report Q1 2012
Business Monitor International Ltd
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CONTENTS
Executive Summary ......................................................................................................................................... 5 SWOT Analysis ................................................................................................................................................. 7
Indonesia Shipping SWOT ..................................................................................................................................................................................... 7 Indonesia Political SWOT...................................................................................................................................................................................... 7 Indonesia Economic SWOT ................................................................................................................................................................................... 8 Indonesia Business Environment SWOT ................................................................................................................................................................ 9
Global Overview ............................................................................................................................................. 10

Container Shipping ................................................................................................................................................................................................... 10 Executive Summary .............................................................................................................................................................................................. 10 Lines To Enter 2012 In The Red .......................................................................................................................................................................... 11 Overcapacity To Plague Medium Term, Beware 2013......................................................................................................................................... 15 Table: Snapshot Of Container Lines' Orders ....................................................................................................................................................... 18 ETR Short And Long Term Benefits To Woo Carrier Expansion ......................................................................................................................... 21 Table: Top 20 World Ports .................................................................................................................................................................................. 24 Port Operators To Face Tougher 2012 As Box Volumes Slow............................................................................................................................. 27 Container Curse To Hit Box Manufacturers, But Outlook Strong........................................................................................................................ 32 Dry Bulk.................................................................................................................................................................................................................... 36 Executive Summary .............................................................................................................................................................................................. 36 Chinese Slowdown Threat Double Downside Risk To Dry Bulk Shipping ........................................................................................................... 37 Vale May Find Solace With South Korea As Chinese Troubles Continue ............................................................................................................ 40 Lines Need To Up Capacity Reduction Strategies To Ease Oversupply ............................................................................................................... 44 Dry Bulk Lines In Choppy Waters, Possibility Of More Bankruptcies ................................................................................................................. 47 Liquid Bulk ............................................................................................................................................................................................................... 51 Executive Summary .............................................................................................................................................................................................. 51 Dirty Tanker Indices Not Very Buoyant ............................................................................................................................................................... 52 Differing Strategies, Differing Fortunes .............................................................................................................................................................. 55 Genmar Bankruptcy Just The Beginning.............................................................................................................................................................. 58 Survival Strategies For Floundering Tanker Operators ...................................................................................................................................... 61 Rumoured Chinese Order Has Potential To Sink Crude Oil Shipping Sector ...................................................................................................... 66
Industry Trends And Developments ............................................................................................................ 70 Market Overview Port Of Palembang ........................................................................................................ 76
Shipping ............................................................................................................................................................................................................... 76 Congestion ........................................................................................................................................................................................................... 76 Terminals, Storage And Equipment ..................................................................................................................................................................... 76 Expansions And Developments ............................................................................................................................................................................ 77 Multi-Modal Links ............................................................................................................................................................................................... 77
Industry Forecast ........................................................................................................................................... 78

Port Of Jakarta (Tanjung Priok).......................................................................................................................................................................... 78 Port Of Palembang .............................................................................................................................................................................................. 81 Table: Major Port Data Throughput, 2008-2016.............................................................................................................................................. 84 Trade ................................................................................................................................................................................................................... 85 Table: Trade Overview, 2008-2016 ..................................................................................................................................................................... 85 Table: Key Trade Indicators, 2008-2016 (US$mn and % change y-o-y) ............................................................................................................. 85
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Table: Indonesia's Main Import Partners, 2002-2009 (US$mn) .......................................................................................................................... 86 Table: Indonesia's Main Export Partners, 2002-2009 (US$mn) .......................................................................................................................... 87
Company Profiles ........................................................................................................................................... 88

Trada Maritime (TRAM) ...................................................................................................................................................................................... 88 Samudera Shipping Line ...................................................................................................................................................................................... 90 Maersk Line ......................................................................................................................................................................................................... 92 Mediterranean Shipping Company (MSC) ........................................................................................................................................................... 99 CMA CGM ..........................................................................................................................................................................................................103 COSCO Container Lines Company Limited (COSCON).....................................................................................................................................108 Hapag-Lloyd .......................................................................................................................................................................................................111 Evergreen Line ...................................................................................................................................................................................................115 APL .....................................................................................................................................................................................................................118 China Shipping Container Line (CSCL) .............................................................................................................................................................123 Hanjin Shipping (Container Operations) ............................................................................................................................................................126 CSAV ..................................................................................................................................................................................................................130
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Executive Summary
BMI View: Bucking The Trend At the moment, Indonesia is one of the few economies showing capacity to buck the trend towards a global economic slowdown. The economy remained dynamic in 2011, and in 2012 we expect it to continue to push ahead. This is good news for the ports and shipping industry. While net exports may falter a little as global demand cools, domestic consumption and investment look resilient. BMI now forecasts 2012 GDP growth of 5.8% (following the 6.3% expansion in 2011). Our outlook for 2013 is for growth to accelerate again to 6.2%. In the five years to 2016 we expect growth to average 6.2% per annum, confirming the country as a regional outperformer.
Industry specific factors also remain broadly positive. Investment interest in modernising the country's port infrastructure is gathering strength. If the government can clear out red tape and reduce political risk, a series of major projects may go ahead over the next couple of years. It is also possible that both domestic and international shipping rates may now be on a modest recovery path.
Headline Industry Data
Tanjung Priok total tonnage growth forecast for 2012 is +5.1% to 44.337mn tonnes, with average growth of 5.2% expected over our forecast period to 2016.
2012 Palembang total tonnage growth forecast is +5.5% to 10.796mn tonnes, with average growth of 5.3% over our forecast period.
2012 Tanjung Priok container growth forecast is +9.4% to 5.173mn TEUs, with average growth of 8.9% over our forecast period.
Palembang container growth forecast for 2012 is +5.9% to 84,680TEUs, with average growth of 6.2% over our forecast period.
Key Industry Trends
Chinese Help For Port Infrastructure Problems? Chinese investment may be the answer to Indonesia's particular situation: encouraging export and manufacturing growth prospects, poor infrastructure, high logistics costs, and inadequate port capacity - a classic bottleneck. China Investment Corporation (CIC), an investment arm of China's sovereign wealth fund, may invest up to US$25bn in Indonesia's mining and infrastructure industries. BMI believes this
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investment by China highlights a trend set other countries, whereby China secures access to national resources through investing in a country's infrastructure.
APM Terminals Looking For An Opening? In September 2011 APM Terminals (APMT) looked likely to expand into Indonesia after the company's parent, AP Moller-Maersk, signed an investment deal with Indonesian port operator Pelindo II. Given that AP Moller Maersk counts the world's largest container line, Maersk Line, and a major port operator, APMT, among its subsidiaries, BMI believes it will seek to establish terminal operations in the country.
Port Of Jakarta Expansion Project To Start Five major groups have been lined up for a US$1.37bn expansion project at the Port of Jakarta, also known as Tanjung Priok. The project, which will boost the handling capacity of the port by 1.8mn TEUs, was scheduled to begin construction before the end of 2011 and be completed by 2015. Among the various consortia competing for the job are large international groups such as Hutchison, Mistui, Evergreen, and Port of Singapore Authority.
Key Risks To Outlook We highlight two main risks to our Indonesian ports and shipping forecasts. Firstly, the country is exposed to another slowdown in global growth, or even the full 'double-dip recession' that many commentators have been fearing. However, it has to be stressed that this is a smaller risk than in many other countries: based on a strong domestic economy, Indonesia was able to remain on a growth path throughout the 2009 recession. If anything, in 2012 we see the economy as more resilient, as we believe Indonesia's long-held status as a high-risk country among investors is gradually changing for the better.
A second downside risk to our outlook is the possibility that the country's ports will not be able to handle the increasing levels of traffic if sufficient investments are not made. Indonesia's main ports suffer from congestion and low efficiency levels, raising the fear that lines could avoid some of the country's key terminals, calling at more competitive neighbouring facilities.
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SWOT Analysis
Indonesia Shipping SWOT
Strengths
Indonesia's position between the Indian Ocean and the Pacific Ocean places the country at the centre of some of the world's major shipping routes, enabling it to reach not only Asian markets but also the US. Indonesia's ports feature as ports of call on major shipping line services such as Maersk Line, CMA CGM, Hamburg Sud and Evergreen. The country's port infrastructure is poor by international standards, and suffers from congestion and low efficiency at times of high demand. Indonesian ports currently lack the capacity to handle some of the world's larger container ships. Indonesia's coal exports to China are growing. Indonesia's dry bulk shipping company, Berlian Laju Tanker, has announced a US$140mn investment into its shipping fleet. 2010 saw a governmental ban on foreign vessels shipping coal, oil and gas come into force. A ban on foreign vessels transporting cargo between Indonesian ports also came into force in 2011. The bans are expected to lead to an expansion of Indonesia's merchant fleet. The ASEAN-China Free Trade Agreement (ACFTA) is expected to boost trade between country members, including Indonesia. There are fears that the country's merchant fleet is not yet big enough to take on the sole transport of coal, oil and gas. Recent delays in granting coal export licences could negatively affect Indonesian ports coal output.
Weaknesses
Opportunities
Threats
Indonesia Political SWOT
Strengths
Indonesia managed a successful transition to democracy in 2004. In addition, the 2009 parliamentary and presidential elections passed peacefully, signalling the consolidation of the democratic process. Since 2009, the government has shown further signs of improvement in both efficacy and engagement. The military's role in politics has gradually been reduced. The prospects of a military coup - which seemed a real possibility in the late 1990s and early 2000s - have diminished substantially. As the military's role in politics continues to wane, Indonesia's political stability should likewise improve. Indonesia's domestic political scene is characterised by a proliferation of minority parties, and formal and informal coalitions are necessary to govern and legislate. Moreover, the efficiency of state institutions is encumbered by bureaucracy and corruption. Prospects for reform are beset with numerous challenges, such as the long-running practice of politicians promising government positions to campaign supporters. The archipelago was impacted by separatist rebellion and ethnic violence in the late 1990s and early 2000s, which took great efforts to bring to heel. In the event of a new economic crisis, calls for regional secession could re-emerge.
Weaknesses
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Opportunities
President Susilo Bambang Yudhoyono's Democratic Party had a strong showing in the 2009 parliamentary elections. Coupled with a strong mandate following his reelection in the same year, the implementation of policies in the legislature should become less problematic. Indonesia's status as the world's most populous Muslim country leaves it well positioned to speak out on global Islamic issues and act as a bridge between the Middle East and the Asia Pacific region. Regional militant group Jemaah Islamiah (JI) poses a lingering threat to security in Indonesia. JI is blamed for a series of attacks, including the Bali bombings of October 2002 and the Jakarta bombings of July 2009. The fact that Indonesia subsidises basic goods means that when the government raises prices, there is a risk of public unrest, or at least a political backlash. Additionally, Indonesia's population is extremely young, with more than 50% of Indonesians younger than 30. Younger populations have historically been a predictor of political instability.
Threats
Indonesia Economic SWOT
Strengths
Indonesia's strategic location between the Indian and Pacific Oceans and its adjacency to major east-west trade routes make it an important economy in the region. Indonesia is also resource-rich and is the world's largest producer of palm oil. Indonesia has a low cost and large supply of available labour resources. Its labour force, the fourth largest in the world, is also one of the world's youngest. Indonesia's economy is not growing fast enough to reduce unemployment, with the rate still relatively high at 6.8% as of February 2011. Many are forced to work in the informal sector. Of particular concern is the youth unemployment rate, which is five times the overall rate. Indonesia's physical infrastructure is considered sub-standard. The archipelagic nature of the country makes it difficult to weave national infrastructure together. Despite an ambitious infrastructure revitalisation plan, the country currently compares unfavourably with its Association of Southeast Asian Nations peers. Indonesia could attract much-needed foreign investment by strengthening its business environment, particularly through reform of its unreliable legal system. Indonesia stands to benefit from the rise of Islamic financing, having adopted new legislation in early 2008 designed to tap into this rapidly expanding sphere. With an overall market share of only 3%, growth prospects for Islamic banking in the world's largest Muslim country are enormous. Production at Indonesia's ageing oil fields has been in decline since the mid-1990s. The country has therefore become a net importer of crude oil in recent years, putting downward pressure on its current account position. Furthermore, rising oil prices have begun to pressure Indonesia's current account, where it typically runs a healthy surplus. The resumption of the Cepu field in late 2009 may help to alleviate Indonesia's dependence on foreign oil. Indonesia is perceived as one of Asia's riskier destinations. This leaves the economy vulnerable to sudden capital outflows at times of risk aversion, which can lead to sharp swings in the currency.
Weaknesses
Opportunities
Threats
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Indonesia Business Environment SWOT
Strengths
Indonesia is South East Asia's largest economy with a nominal GDP of US$500bn and is the world's fourth most populous country with more than 240mn people. It thus offers investors a vast home market in which to do business. As a member of the Association of South East Asian Nations' Free Trade Area, Indonesia is committed to lowering tariff and non-tariff barriers to trade. Corruption remains a major problem. Indonesia ranked 100th out of 182 countries surveyed in Transparency International's 2011 Corruption Perceptions Index, where a low ranking denotes a higher degree of corruption. Indonesia's excessive bureaucracy makes it a difficult place to do business. Among Asian economies, Indonesia has the longest period to start a business. Labour laws are also considered excessive. President Susilo Bambang Yudhoyono's administration has gradually been reforming the business environment, particularly by strengthening the legal system and fighting corruption. If sustained, this would boost investor interest in Indonesia. Although reform has been slow, the government has shown itself to be increasingly willing to address important issues. Indonesia has been amending its debt and banking regulations, with the aim of attracting Islamic financial activities. Over the past five years, Islamic banking growth has averaged more than 65%. Recent high-level business disputes between the government and foreign investors demonstrate that even after investments are up-and-running, there is still scope for legal problems or obstacles posed by legal wrangling. Security threats are a concern for investors. Despite several of its top leaders having been arrested in recent years, militant group Jemaah Islamiah remains active. There is also a low-level threat from separatist rebels or from inter-communal tensions.
Weaknesses
Opportunities
Threats
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Global Overview
Container Shipping
Executive Summary
Container lines will no doubt be looking to force rates up in 2012, as operators face a year of losses in 2011 on the back of sustained declines in rates on the major trade routes, brought about by overcapacity. BMI warns that carriers will face an uphill struggle in 2012, as overcapacity is set to remain an issue and could become more acute with the slowing global growth outlook.
In Lines To Enter 2012 In The Red we explore the how lines will react to the likelihood of losses in 2011, and highlight the fact that while we do not expect the depth of downturn that was experienced in 2009, the environment is looking similar.
In Overcapacity To Plague Mid Term, Beware 2013 we investigate the options available to shipping lines to combat overcapacity. We warn of the threat the sector faces in 2013 with the influx of newbuilds, many of which are mega vessels, including the largest container ships ever launched (Maersk's Triple-E fleet), and the impact this will have on the market if demand has not picked up sufficiently.
ETR Short- And Long-Term Benefits To Woo Carrier Expansion analyses how the strategy of diversifying into emerging trade routes (ETRs) will offer a safe haven for lines, as growth continues to tick up. ETRs are not as affected by the decline in rates as oversaturated developed routes. However, while offering aid to the beleaguered container sector, they will not be the industry's saviour in the medium term, as volumes shipped on these routes are not great enough to carry the sector. Looking ahead, as trade dynamics shift and volumes on ETRs pick up, their role will increase and lines currently expanding their ETR coverage will be the first to benefit. However, the development of ETRs hinges on a major factor: the development of ports that will be calls on ETRs. Further investment is needed, not only to cater for projected volumes, but to woo lines into calling in the first place.
As well as analysing the outlook for the container shipping sector, we investigate how the tough box shipping environment and slowing economic growth will affect two sectors with strong links to the container shipping sector: port operators and container manufacturers.
In Port Operators To Face Tougher 2012 As Box Volumes Slow we highlight the fact that port operators have been relatively sheltered from the tough operating environment faced by their container line clients. However, the slowdown in growth and the likelihood that box lines will seek rebates or rate declines will be of concern to terminal operators. While BMI expects container volume growth to slow, and perhaps even start to decline year-on-year (y-o-y), we do not expect volumes to fall to 2009 downturn
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levels. However, a slowdown, coupled with container lines pushing for cheaper rates, does threaten port operators' bottom lines and highlights how tied they are to the fortunes of the container shipping sector.
In Container Curse To Hit Box Manufacturers, But Outlook Is Strong we investigate the impact on container manufacturers. Like global terminal operators, container manufacturers' clients are the major container lines, and it stands to reason that they too will be affected as clients struggle in the current operating environment. However, BMI argues that while container manufacturers face an uncertain outlook in the short term, of all the sectors associated with container shipping this is the segment has the strongest outlook.
Lines To Enter 2012 In The Red

Container lines will enter 2012 seeking ways to get back into the black, with many lines facing a full year loss in 2011. H111 results highlight the predicament in the box shipping sector, with the few companies that managed to remain in profit for the first six months of 2011 witnessing massive year-on-year (y-o-y) declines in profit. In BMI 's opinion, nothing has changed in H211. If anything, the operating environment is getting tougher, as not only do lines face overcapacity but previous demand is drying up, placing further downward pressure on rates.
At A Loss Container Lines H111 Net Income (US$mn)
* Japanese data for Q1 of financial year. Source: Bloomberg, BMI
The chart highlights the tough operating environment that container lines have faced so far in 2011, with
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only a few of the major players remaining in the black. The two majors Maersk Line and CMA CGM ( MSC - ranked second globally - does not publish its financial results) appear confident that they can ride out the current assault on their bottom lines, but many in BMI 's view will not be so lucky.
Rate Decline Gets Steeper In H211 This negative view stems from the continuing decline in freight rates during H211. According to data from the Shanghai Containerised Freight Index (SCFI), the decline in rates so far in H211 (June 3 2011September 30 2011) is deeper than that witnessed in H111 (January 1 2011-June 3 2011). Perhaps even more worrying is the fact that H211 is traditionally the period when rates increase due to the peak season. However, the peak season did not materialise this year, with the overcapacity of vessels available for shipping containers ensuring that a tick up in demand did not equate to an increase in rates.
BMI notes that lines attempted peak season surcharges to lift rates on both the major trade routes of AsiaEurope and the transpacific. These failed, however, with rates ticking up on the Asia-Europe for five consecutive weeks and on the transpacific for two consecutive weeks in August, before recommencing their downward trajectory. At the time of writing the SCFI's last published data for September 30 puts rates for both Asia-Europe and transpacific at the lowest levels BMI has seen since we started tracking the index back in August 2010.
A New Low LHC= SCFI Europe (Base Port*), US$ Per TEU RHC= US West Coast (base port*), US$ per FEU
* Europe base ports = Hamburg, Antwerp, Felixstowe, Le Havre; US West Coast base ports = Los Angeles, Long Beach, Oakland. Source: SCFI
Equally worrying is the fact that there appears to be no end in sight for the problem of overcapacity, with
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data from Lloyd's List Intelligence in September 2011 indicating that a further 1.1mn twenty-foot equivalent units (TEUs) is due online between now and the end of 2011.
Overcapacity + Weakening Demand= 2009 All Over Again Coupled with the continued rate decline is the slowing in demand that we are witnessing in H211. In the first half of the year, when rates were ticking down on the back of overcapacity, they could have fallen far lower if not for the fact that demand was increasing y-o-y. The sector again faces the twin threats of overcapacity and weakening demand, as previously seen in 2009.
Dropping Down Once More LHC = European Commission's Business And Consumer Survey RHC= Thomson Reuters/University Of Michigan Consumer Sentiment Index
Source: European Commission's Business and Consumer Survey, Thomson Reuters/University of Michigan Consumer Sentiment Index
BMI highlights that data from demand drivers does not look good. Consumer sentiment is dropping, with European consumer sentiment falling to -19.1 in September 2011 - its lowest level since August 2009. In the US, the Thomson Reuters/ University of Michigan Consumer Sentiment Index ticked up to 59.4 in September, an improvement on August's 55.7. The increase was attributed by the survey's director, Richard Curtin, to the fact that 'consumers have shifted from anticipating deeper declines to the growing belief that the economy will stagnate at its currently depressed level.' BMI highlights that, while the index ticked up in September, it was still 12.9% down y-o-y.
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Bellwethers Display Weakening Demand Outlook The decline in demand is already seeping through into indicators we watch to gauge the health of the global container shipping sector. Bellwether ports, canal traffic and trade route data are all starting to show a y-o-y slowing in growth.
Suez Canal sailing data, a bellwether for volumes on the Asia-Europe trade route, show that container vessel net tonnes are slowing in H211, so far growing by just 11% y-o-y compared to a y-o-y growth of 16% in H111. We are noting a similar trend for our US indicators, with trade not just slowing at the bellwether US west coast ports of Los Angeles and Long Beach, but declining. Container throughput volumes at the Port of Los Angeles decreased y-o-y between June and August 2011, while y-o-y box throughput at the Port of Long Beach fell in August.
Bellwethers In Decline LHC = Suez Canal Throughput, Container Ship Net Tonne, % Change Y-o-Y RHC: Port Of Los Angeles Container Throughput, % Change Y-o-Y
Source: Suez Canal Authority, Los Angeles Port Authority
Route Cuts, Idling And Super Slow Steaming To Increase The fear now is that lines will face even greater overcapacity in the container sector as the supply of vessels greatly outweighs the dwindling demand. Lines are starting to react to this fear and we are seeing improved tonnage management. BMI expects that during the winter lull (October-December) lines will take the opportunity to decrease their exposure to the major shipping routes. The Grand Alliance (made up of Hapag-Lloyd , NYK and OOCL ) has announced that they will mothball one of their transpacific services, Japan-China Express (JCX), from the end of October 2011.
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Route cuts will lead to an increase in idled tonnage, which has been ticking up over the last few months. AXS Alphaliner reports that an estimated 156 vessels (335,000TEU capacity) were in lay-up at the end of September 2011, up 21.8% y-o-y. The container shipping consultancy expects the rate of idled vessels to hit 500,000TEUs before the end of 2011.
The main players to be hit by this overcapacity management tactic will be the vessel owners. Lines are redelivering their tonnage as charters come to an end and are not taking on more vessels due to the downturn in the box shipping market, leaving owners with little choice but to lay-up. The tough operating environment that containership owners face is highlighted by a report from the Hamburg Shipbrokers' Association, which shows that average daily charter rates for a 4,250TEU box ship on a two year charter had dropped by 8% from US$16,046 to US$14,750 for the week ending September 30 2011.
Lines are also absorbing excess capacity through super-slow steaming. Slow steaming was put to considerable use during the 2009 container shipping downturn and has continued since. Super-slow steaming is its even slower variation, which allows lines to use extra tonnage by travelling slower but retaining their service. In August Maersk Line and CMA CGM were reported to have enacted super-slow steaming on their jointly-operated AE8-FAL 5 service. The service offers a rotation of Ningbo, Shanghai, Shenzhen-Yantian, Tanjung Pelepas, Port Kelang, Le Havre, Rotterdam, Hamburg, Rotterdam, Zeebrugge, Port Kelang and Singapore. The route goes via Suez on the front haul and via the Cape of Good Hope on the back haul. The impact of super-slow steaming will mean that 16 days are added to its sailing time. It now takes 37 days for a ship on the AE8-FAL 5 service to sail on the back haul from Zeebrugge to Port Kelang, while on Maersk Line's AE1 service, which is not super-slow steaming, the sailing time is 21 days between Bremerhaven and Singapore.
Many operators no doubt hope that Q112 will mimic Q110, when - having reacted to the downturn in 2009 - demand spiked, more tonnage was needed and lines were able to push up rates. BMI is wary, however, as the demand outlook is weak, with economic uncertainty leading to weariness for the consumer sector. While demand could tick up in Q112 on the back of re-stocking after the holiday period, with rates on the major box routes at year lows, there is a long recovery ahead for the box shipping sector.
Overcapacity To Plague Medium Term, Beware 2013

Overcapacity is set to continue to haunt the box shipping sector in the medium-term. While BMI notes that the industry is well practised in dealing with this threat, having faced varying degrees of the problem for the last three years, we fear that as demand slows and new and larger vessels come online the problem of overcapacity will become more acute and could lead to prolonged periods of oversupply, and by extension low rates.
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Demand Slows But New Capacity Shows No Signs Of Letting Up Rates in 2011 have continued to tick down and look set to head lower, with the demand that existed earlier in the year evaporating as the global macro picture turns sour. We have recently revised down our 2011 and 2012 real GDP growth forecasts and are now expecting an out-turn of 3.1% in 2011 and 3.3% in 2012, down from our previous forecasts of 3.2% and 3.6% respectively, with downward revisions to our US and Eurozone numbers primary contributors to dragging the global growth rates lower.
Slowing Port Of Shanghai Container Throughput, 2007-2013 (TEU)
e/f = BMI estimate/forecast. Source: Port Authority
This global slowdown in growth filters into our throughput projections for our bellwether ports, with the world's largest container port, China's port of Shanghai forecast to handle an increase in boxes year on year (y-o-y) of just 6.4% in 2011, down from the 16.2% recorded in 2010. Throughput growth is set to slow further in 2012, with container levels shipped through the port set to increase by just 2.8%. The slowdown in growth is to be expected; growth in throughput at the port has recovered from its low level during the 2009 downturn, but the global economic malaise is curtailing further increases.
The problem is that while demand is slowing, new tonnage is coming online, further adding to the problem of overcapacity. In 2011 and 2012 Lloyd's List Intelligence estimates that 1.18mn and 1.6mn 20foot equivalent units (TEU) are due on line respectively.2013 To Tip The Scales While BMI believes that overcapacity will be an ongoing problem at the end of 2011 and into 2012, looking further ahead we highlight 2013 as a year set to cause massive problems. Our fears for 2013 are based on the fact that a large amount of tonnage, at sizes never before seen, are due online in 2013. We
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doubt demand in 2012 will be strong enough to soak up the excess tonnage, and while global demand is expected to pick up in 2013 we believe it will not be strong enough to counter the massive increases in capacity, thereby leading to a situation of overcapacity coming on top of an already over supplied market.
The influx of vessels in 2013 is due to shipping lines returning to yards at around the same time after the 2009 downturn, when carriers' bottom lines were recovering and shipyards, keen to win back customers, offered low building prices. The en-masse ordering has lead to shipbuilding deadlines in the same year, thereby adding capacity at the same time.
Adding More Capacity To An Oversupplied Market Container Shipping Newbuild Orderbook Delivery
Source: Lloyd's List Intelligence
BMI notes that the shipping sector has been in this position before, but in 2013 the container shipping market faces not only the threat of a large amount of vessels coming online at one time, but also much larger vessels than the sector has ever had to accommodate.
Is Bigger Really Better? Maersk Line is once again leading the 'bigger is better' trend placing an order for 20 18,000TEU vessels, the first of which will be due online in 2013. The line was also reported to be seeking to convert some of its 8,600TEU fleet into 10,000TEU vessels. Conversion is a strategy that CMA CGM is also reported to be investigating. It was reported in March that the three 12,500TEU vessels that German ship-owner Claus-Peter Offen has on order at South Korea's Samsung Heavy Industries, and of which CMA CGM is due to take direct control, could be increased to 16,000TEU capacity.
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BMI expects the trend for 18,000TEU to pick up and although Maersk is the only owner-operator to order such a class of vessels, Canada's containership owner Seaspan is reported to be in talks with South Korean shipyards over an order for a fleet of 18,000TEU vessels.
We highlight that it is not only the 18,000TEU giants that could cause more acute problems of overcapacity for the industry. A number of lines that have placed orders in the last 12 months have ordered vessels, which when delivered will be the largest in their fleets. For example Hapag-Lloyd has ordered a fleet of 13,200TEU vessels, due online from mid-2012 to the end of 2013. Hapag-Lloyd's current largest owned vessel in operation is 8,749TEU, showing the company's considerable upgrade in vessel capacity.
Table: Snapshot Of Container Lines' Orders
Company OOCL OOCL
Vessel Size 10- 13,000TEU (4 on charter to NYK) 2- 8888TEU 10-8,400TEU The line has also signed a letter of intent for two 10,700TEU vessels, which would bring the total NOL order package to US$1.2bn. Two of 8,400TEU fleet upgraded to 9,200TEU 10- 8,000TEU 8- 3,800TEU 6- 9,600TEU 4- 13,200TEU upgraded earlier order of six 8,750-TEU to 13,200TEU total of 10 13,200TEU 2- 8,000TEU 5- 8,000TEU 10-14,000TEU Order of 10- 18,000TEU option of 20 more 3- 4,700TEU
Date Due 6 delivered by 2013, 4 more 1 delivered 2014 na

st
NOL Evergreen Hamburg Sd Hamburg Sd Hapag-Lloyd CSAV CSAV NOL Maersk Line Hanjin Shipping Costamare (long-term charter for Evergreen) Evergreen
na Due for delivery in 2012 na Due to start being delivered May 2013 Delivered from mid-2012 to end of 2013 Due for delivery June and July 2012 Due for delivery 2011- 2012 Due for delivery 2013-2014 Due for delivery 2013-2015 Due for delivery 2012-2013
5- 8,000TEU 10- 8,000TEU

st
Due for delivery 2013 1 due for delivery 2013
na = not available/applicable. Source: BMI
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Asia-Europe Overcapacity Bubble Inflates Overcapacity for the most part will be constrained to the Asia-Europe route, as this is the only route on which the 10,000TEU plus vessels can operate. While BMI expects the cascade effect to continue, with larger tonnage filtering down to other trade routes, this will be dependent on developments in the global port sector, so that facilities can handle larger vessels.
Therefore, in our view Asia-Europe will continue to be plagued by overcapacity brought on by the introduction of so many mega vessels. We note that according to current rates from the Shanghai Containerised Freight Index (SCFI), rates on the Asia-Europe trade route have been the worst affected.
What Risk Mitigation Tactics Are On Offer? Tonnage management strategies of laying up vessels and slow steaming are set to remain a prominent part of the lines' arsenal in the fight against overcapacity, but BMI fears with such capacity due online in such a short period of time and the growing likelihood of a spike in overcapacity, carriers might once again turn to tactics last implemented during the 2009 downturn.
Signs To Watch For Tonnage Management Strategies
Source: BMI
These tactics are postponing vessel deliveries and in the extreme cancelling orders. Currently yards appear to be on schedule for delivery projections and lines are not suggesting pushing back orders. But from mid 2012 onwards, if demand really does slow to the levels we are projecting, we believe many box
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lines will start to re-evaluate their delivery schedules and talks with yards to delay the launch of vessels could start.
Cancellation of orders will only be implemented as a last resort, as lines will face a hefty fine for implementing such a strategy. The tactic of cancellation will only be used if lines are struggling to pay for their new tonnage, which is something we witnessed in 2009, when declines in rates left lines in the red and unable to meet their debt obligations. If cancellations do start to arise then we would see a replay of 2009, something we do not yet believe will happen.
Scrapping Candidates Available Fleet Age, September 1 2011
Carriers have one last strategy at their disposal, as well as managing current tonnage and curtailing the entry of new tonnage, lines can also permanently remove tonnage. In the container shipping sector a reasonable buffer exists, with 7.2% of the current operating container fleet aged above 25 years. Over the medium-term more vessels will enter this age range offering more scrapping opportunities. While we expect scrapping to pick up in the medium term, we expect it to remain in the 25 and above age range. If we start to see younger ships heading to the breakers yards, it would be an unprecedented move and would likely come if the twin forces of massive overcapacity and a huge decline in rates were coupled with an uptick in scrap metal prices. Either way, even during the worst of the downturn in 2009, BMI saw no evidence of a vessel of under 25 years being scrapped and such a scenario would be very ominous indeed.
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ETR Short And Long Term Benefits To Woo Carrier Expansion

BMI expects increased interest in emerging trade routes (ETRs) in 2012 and beyond, as lines look to diversify away from the major routes, which have become swamped with capacity and in our view will continue to suffer most acutely from the decline in rates.
Developed Routes Rates To Suffer Rates have declined across the board, with the Shanghai Containerised Freight Index (SCFI) dropping by 39% between August 6 2010 (when BMI first started tracking the index) and October 14 2011 (last available data). Some routes have weathered the decline better than others, and some trade routes have actually escaped the supply imbalance with an increase in rates.
Developed Routes Tanking, But Emerging Routes Offer Hope SCFI Index % Change, August 6 2010- October 14 2011 (US$ per TEU/FEU)
Source: SCFI, BMI
The developed shipping routes have been worst hit in the August 6 2010-October 14 2011 period, with rates on the Asia-Europe trade route experiencing the largest decline in the SCFI, falling by 63% from US$1,879 per twenty-foot equivalent unit (TEU) to US$697 per TEU. The transpacific has also suffered, with rates dropping by 46% from US$2,787 per forty-foot equivalent unit (FEU) to US$1,495 per FEU over the period.
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We expect the rate declines on these routes to continue going into 2012 and for the industry to continue to battle oversupply in the medium term. As previously highlighted in 'Overcapacity To Plague Midterm, Beware 2013' BMI expects extreme downward pressure on box shipping rates in 2013. As a larger volume of new capacity enters the market and the sector will once again experience the impact of a flood of next generation mega vessels, which are due to press Asia-Europe rates lower.
Rates On ETRs Weathering The Storm Emerging trade routes offering high demand growth, which are as yet unsaturated, will be of great interest to operators. The potential for high growth is evident in our throughput forecasts for some of the bellwether ports on the emerging routes. The Port of Santos in Brazil, for example, is projected to record an increase in container throughput of 81% over the medium term (2011-2016), on the back of growing domestic consumer demand.
EM Port Growth Outpacing DM Ports Port Of Santos And Port Of Los Angeles Container Throughput, % Change Y-o-Y
e/f = BMI estimate/ forecast. Source: Port Authority, BMI
At western Africa's main container terminal, the Port of Lagos, the global port operator APM Terminals (APMT) is planning to expand its facility and increase its exposure to this growing market. In terms of measuring the demand outlook for intra-Asia trade, BMI highlights Vietnam's main container port of New Saigon. Over the medium term the port is projected to witness a 43% increase in throughput on the back of Vietnam's growing role as the factory of Asia, catering not only for the major consumer demand markets of the US and Europe, but also China's growing consumer needs.
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BMI has noted a trend of lines expanding their coverage of ETRs over the last 12 months. This is understandable when you look at how rates on these routes have performed in comparison with rates on the major trade routes. ETR rates over the August 6 2010-October 14 2011 period highlight the ability of such routes to weather the downturn in rates. Although rates from the Port of Shanghai to Lagos in Nigeria (West Africa bellwether) and from Shanghai to Santos in Brazil (South America bellwether) have decreased in this period, down 14% and 27% respectively, their decline is minimal compared to the drop in rates on the major routes.
Rates on intra-Asia routes have fared even better, with rates from Shanghai to ports in Japan increasing by 5% over the period, and rates to Hong Kong and Korea's bellwether port of Busan growing by 12% and 13% respectively.
Catering To ETRs Specific Requirements BMI notes that lines have already started to lay the ground work, which will lead to increases in coverage of ETRs in 2012 and beyond. Lines have been expanding their existing coverage of intra-Asia, Asia-Latin America and Africa. Lines with minimal coverage of ETRs are looking at ways to gain entry into the market. Germany's Hapag-Lloyd, for example, increased its coverage of intra-Asia in April 2011 by joining forces with Thailand's Regional Container Lines to launch a service linking Chinese and South Korean ports to Sri Lanka, India and Pakistan. BMI believes that other major non-Asia based lines will implement similar strategies in the medium term.
So determined are carriers to break into ETRs that they are prepared to stump up funds for the design of specific tonnage to operate on these routes. Maersk Line has launched a fleet of vessels, known as the WAFMAX, to operate on its West Africa services. The vessels have been constructed with a length of 249.1m, a beam of 37.4m and a draft of 13.5m. Maersk Line stated that they have been designed to these specifications as this is the maximum vessel size that can pull into West African ports. Some vessels will also be equipped with onboard cranes, allowing these ships to operate on routes where the ports of call do not have ship-to-shore cranes.
Mitsui OSK Lines (MOL) is following the same strategy, but in Latin America. The Japanese shipping firm is taking delivery of 10 new 5,600TEU vessels, which have been specifically designed to be able to navigate the shallow-draft ports of South America.
ETRs Have A Role, But They Alone Can't Save The Sector BMI asserts that ETRs have their role to play in offering diversification, which will aid lines in protecting their bottom lines. However, the role of ETRs must be put into perspective; they are not the saviour of the box shipping sector. ETRs do indeed offer high growth, but it is from a low base and in terms of volumes, developed routes will continue to offer the highest volumes for transit for some time to come.
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This can be seen in the top 20 container ports globally. The rankings include all of the ports on the developed routes, including the major Chinese export ports, which send goods to the US and Europe. The major transhipment hubs on these routes, which are: Singapore; Hong Kong; the Malaysian ports of Klang and Tanjung Pelepas and the UAE port of Jebel Ali, also feature and the main import box ports of LA and Long Beach on the transpacific and Rotterdam, Antwerp and Hamburg on the Asia-Europe trade route all make it into the top 20.
Table: Top 20 World Ports
Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Port Shanghai Singapore Hong Kong Shenzen Busan Ningbo & Zhoushan Guangzhou Qingdao Jebel Ali Rotterdam Tianjin Kaohsiung Port Klang Antwerp Hamburg Los Angeles Tanjung Pelepas Long Beach Xiamen Bremen
Country China Singapore Hong Kong China South Korea China China China UAE Netherlands China Taiwan Malaysia Belgium Germany USA Malaysia USA China Germany
2010 throughput, TEU 29,070 28,430 23,530 22,510 14,180 13,144 12,550 12,012 11,600 11,146 10,080 9,181 8,900 8,468 7,896 7,832 6,530 6,263 5,820 4,888
Source: Port authorities
BMI also highlights that, while we expect lines to continue to increase their exposure to ETRs, their earnings will remain reliant upon the major trade routes. While the exposure of each line to routes varies, BMI highlights the bellwether of the industry, Maersk Line, which is heavily exposed to Asia-Europe, with the route accounting for a massive 38% of volumes carried in 2010.
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Therefore, we believe that we will not see a boom in the shipping sector until volumes coupled with rates recover on the developed routes.
Asia-Europe Dominates Distribution Of Volumes Across Maersk Line Routes, 2010
Source: Maersk Line
Expand Now To Benefit In Short And Long Term That is not to say that ETRs will not increase in significance over the longer term. Indeed, at the rate some ports on ETRs are growing, we are likely to see the likes of Santos enter the global top 20 box ports in the long term, we could even envisage this possibility in the medium term, should volumes follow their current growth trajectories.
BMI believes that it is both the short-term play (diversification away from oversaturated routes) and the long-term play (shifting trade dynamics) which will continue to encourage lines to increase their ETR focus. While growth in China is projected to slow, and cause a domino effect that would see economic growth slow in other emerging markets, we believe that emerging states' developing consumer markets offer the most growth potential, a factor that will feed down into the development of ETRs. The ETR of intra-Asia, for example, is set for major growth over the medium term and beyond, as China's growing consumer base seeks more consumer goods. We have already highlighted how we believe Vietnam will benefit from this, but other Asian nations stand to gain as both China and India rise, thereby boasting intra-Asia trade.
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Lines which break into ETRs now are positioning themselves well for the future. They are gaining experience and developing a client base, which will serve them well in the long term as demand on these routes picks up.
Infrastructure Holds The Key To Unlock ETRs Potential BMI highlights one major factor that will determine the speed of the development of ETRs: infrastructure. The growth of trade on ETRs will be dependent on the development and expansion of ports and supply chains. In many cases ports on ETRs, such as intra-Asia, are starting from a low infrastructure base. We highlgith that ports in the countries that will feature as ports of call on intra-Asia routes suffer from very low levels of infrastructure.
Investment Needed Asia Ports Infrastructure
Source: Global Economic Forum's Global Competitiveness Index
Asian ports which feature as calls on developed shipping routes, such as the transhipment hubs of the Port of Singapore and Hong Kong, score highly, ranked not only first and second in the Asia region, but first and third respectively globally. In contrast, ports that will feature as ports of call on intra-Asia routes score badly. Vietnam, which we expect to play a major role in catering for the needs of China's growing consumer base, could see itself being held back by its port infrastructure, which is ranked 111th out of 142 countries globally.
We highlight that investment and expansion work is already underway and is expected to continue in the medium term. We also note that ports in emerging markets face some difficulties; ports will only attract
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investment when their need is proven. The problem is that they must already be up to a certain standard to attract this trade in the first place. In Vietnam, the uptick in volumes across the country's port sector (container levels through the nation's ports grew by a massive 525.9% between 2000 and 2010 from 1mn TEUs to 6.4mn TEUs) and the potential of the country as the 'factory of Asia,' has led to global port operators such as AMP terminal (APMT), Hutchison Port Holdings (HPH) and DP World investing in the development of terminals in the country.
The drive to develop ports on ETRs is perhaps best displayed by the differing degrees of investment that are flooding into emerging nations' ports compared to that of developed states' facilities. Using the US and Brazilian port sector as an example, BMI's Infrastructure Key Products Database, which tracks infrastructure projects and investment across the globe, highlights the scale of the planned investment in Brazil's port sector compared to that of the US. In the Brazilian port sector, US$16.6bn is projected to be invested, while the more developed US port sector is expected to receive just US$6.9bn in investment.
In BMI's view, the major areas that require investment are expanded quays, with deeper draughts so that larger vessels can operate on the routes. The industry trend is for larger vessels, and as new mega vessels come online on the Asia-Europe, lines will seek to cascade their tonnage. ETRs stand to benefit from this, as lines will be looking to move larger capacity vessels on to these routes. However, they will only be able to do so if the ports can handle larger ships. For volumes to grow, investment is required in equipment and storage areas to stave off congestion, a problem frequently associated with ports in emerging markets.
BMI also highlights the need for investment and streamlining away from the port, further up the supply chain. This is an issue we have previously highlighted in Vietnam. While considerable investment has been funnelled into the port sector, with the involvement of major port operators, more needs to be done further up the supply chain to the country's rail and road network to ensure that goods can get to and from the port in a cost effective manner without delays or bottlenecks.
Port Operators To Face Tougher 2012 As Box Volumes Slow

As we head into 2012, port operators, who have not suffered the same fate as container lines and largely remained profitable in H111, are no doubt wary of the slowing growth in box volumes and the tough operating environment faced by container lines, two factors which could mark the end of their relative outperformance.
Differing H111 Fortunes H111 results highlight the disparity in the operating environment faced by the container shipping and port operating sectors. The top four port operators remained in profit in H111, a feat accomplished only by a minority of container shipping companies, which have so far posted results in 2011.
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The relative success of terminal operators, in contrast with their carrier counterparts, is due to the fact that while container volumes have continued to increase y-o-y, problems of overcapacity have forced rates down, thereby damaging the bottom lines of carriers. Port operators meanwhile, have been shielded from the rate decline and have benefited tremendously from the increase in volumes, a trend we first highlighted in Lines To Enter 2012 In The Red, October 14 2011.
A Tale Of Two Sectors Container Lines And Port Operators Net Income, H111 (US$mn)
* Japanese data is for financial year. Source: Bloomberg, Company financial results, BMI
Port Operators Outperform Confidence in port operators over container lines is borne out in their comparative stock prices. Port operators DP World and COSCO Pacific continue to outperform container line bellwethers Neptune Orient Line (NOL) and Evergreen.
While all share prices have fallen since the beginning of the year, hardly surprising considering the volatility of stock markets worldwide, the decline in container lines' shares has been much steeper than that witnessed in those of port operators. Evergreen Marine and NOL's share prices fell by 40.3% and 48.4% respectively between January 1 and October 27 2011, while DP World and COSCO Pacific's shares dipped by just 12.7% and 22.3% respectively, indicating that investors saw port operators as a safer haven than container lines.
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Ports Outpace Lines Stock Price, Rebased To January 1 2011
Source: Bloomberg
Operating Environment To Get Tougher As Volumes Slip BMI fears that the port operators' ability to weather the tough operating environment in the container shipping sector is set to come to an end, as volumes are slowing and their clients, the container lines, are suffering and will no doubt seek discounts in port fees, as they did in 2009.
The bellwether chart highlights the slowing in growth, with the y-o-y percentage change of container traffic through both the Suez Canal (an indicator for box volumes on the Asia-Europe trade route), and the port of Los Angeles (which as the US' largest container port is a bellwether for the transpacific box volumes), dipping down.
The decline in volumes is indeed a great worry for port operators. Although BMI notes that we are still a considerable way from the declines in throughput seen in 2009, we are witnessing a slowing in throughput growth at terminal operators' ports and this is putting pressure on the operators' bottom lines. In H111 DP World's container volumes increased by 11% y-o-y, but this had slipped slightly to an increase of 10% in Q311. The slowing in throughput growth is more evident in COSCO Pacific's results. In H111 the Chinese port operator's total container volumes increased by 19.7% y-o-y; in Q311 growth stood at just 10.2%.
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Bellwethers In Decline LHC = Suez Canal Throughput, Container Ship Net Tonne ,% Change Y-o-Y RHC: Port Of Los Angeles Container Throughput, % Change Y-o-Y
Source: Suez Canal Authority and Los Angeles Port Authority
Port Operators To Be Hit By Box Lines' Cost Cutting The second pressure that we believe port operators will face on their bottom lines is from container lines seeking to secure discounted port rates. As container shipping companies continue to face a tough operating environment and seek ways to cut costs, we believe one of their first ports of call will be to port authorities and port operators. In 2009, the 'we are all in the same boat' strategy worked as port operators came to the aid of their clients as global trade declined. We believe that port operators might not be so quick to come to the rescue this time, as although growth in box volumes is slipping, the problem of overcapacity is of the carriers' own making. This is a view held by the Port of Los Angeles Executive Director, Geraldine Knatz, who points out that the port cut its own budget in 2009 in order to aid the container lines via a 6% rebate. As quoted by American Shipper, Knatz stated: 'This time we're not doing that. We kind of tightened our belts because their success is our success... but to see the carriers do the same thing in terms of water capacity, I just don't get it.'
We believe that although some ports will no doubt resist the pressure from carriers to offer another rebate or decrease their fees, others will have to yield or else face losing their clients to rival ports.
Emerging And Frontier Markets Offer The Best Expansion Opportunities BMI highlights that emerging trade routes offer some respite for container lines, with their high growth potential, as do ports in emerging markets. Emerging markets ports, while more likely to suffer instances of congestion and poor supply chain links, do offer higher growth outlooks and by extension, increases in revenue.
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Q3 Sounds The Warning Container Throughput (% change y-o-y)
Source: DP World, COSCO Pacific
Emerging In The EM And On The Frontier DP Worlds Developed Market Versus Emerging Market Coverage, October 2011*
* Ports under development were included in the count. Source: DP World
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Port operators have been much quicker than their shipping line colleagues to tap emerging markets, with APM Terminals (APMT) and Hutchison Port Holdings, for example, already boasting operations in Vietnam, as well as other emerging markets such as Argentina and Sierra Leone in the case of APMT. We expect port operators to concentrate their expansion plans on the emerging markets, as ports in developed states- while offering larger volumes of throughput - have a poor growth outlook.
We also highlight the foray of port operators into frontier markets, which again contain higher risks, but also higher rewards. DP World, for example, operates two container terminals in Djibouti, two terminals in Senegal and one in Suriname. As the operations of ports in developed states are now fairly saturated, further expansion into new markets will give port operators both diversity and avenues for new revenue generation.
Container Curse To Hit Box Manufacturers, But Outlook Strong

Container manufacturers, while expected to witness a slowing in demand on the back of weakening orders from container lines in the short term, have, in BMI's view, the strongest outlook of all the sectors associated with the box shipping sector, both in the short and long term.
The Q311 results for China International Marine Containers (CIMC), one of the major container manufacturers, show that the sector is not completely protected from the tough operating environment of the global box shipping sector despite a very good H111. During the quarter CIMC's net profit declined by 63.62% year-on-year (y-o-y), with revenues down 14.3%. While Q311 has indeed been a tough quarter for container manufacturers, and Q411 is likely to be equally tough, companies' bottom lines are likely to be somewhat protected for the full year by the stronger results recorded by manufacturers in the first half of 2011. During H111 CIMC's net profit increased by 189.5% and Singamas, another major box manufacturer, posted a y-o-y profit increase of US$91.7mn.
BMI also highlights that while Q311 has ended the growth in box manufacturers' profits, the companies are still recording profit, unlike their box shipping colleagues. Of the two Q311 results reported so far, China Shipping Container Lines (CSCL) and Evergreen Marine display a trend of carriers reporting losses for this period.
Corrosion And Q1 Uptick Off Short Term Relief Box manufacturers will continue to benefit from the high rate of replenishment in their sector. The industry model is built on the continued renewal of boxes. Shipping boxes face some of the most extreme weather conditions, just as vessels need eventually to be scrapped, so too do containers. However, due to the fact boxes are made of low grade steel, as opposed to the high grade steel that goes into the making of ships, their lifetime is considerably shorter, requiring manufacturers to have a continuous supply available
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for the shipping community. In CIMC's 2010 annual report the company announced that approximately 1.2mn new twenty-foot equivalent units (TEUs) would be required per year.
While the constant demand is good news for container manufacturers, stronger demand is obviously better for the companies' bottom lines. With a slowing in box volume demand on the horizon, box manufacturers are right to be wary.
The big question is whether 2012 will see a new decline in global trade, or herald a steady recovery for container shipping, akin to that in 2010. In BMI's view the traditional uptick in volumes is likely to play out in the first few months of 2012, as shippers rush to refill inventories after the holiday period and get goods out of China before the country's New Year, when factories shut down for a week (China's New Year in 2012 will be on January 23). The question is whether demand will be sustained, as such an uptick in demand will place some pressure on the capacity of both ships and containers, a situation we witnessed in Q110. Demand for containers saw a massive number of orders placed in 2010 as shipping lines, which had curtailed their ordering in the downturn, were short of boxes to meet the uptick in demand.
2012 To Replicate 2009 or 2010? Singamas Production Output (TEU) And Profit/Loss (US$mn), 2006-2010
Source: Singamas
Larger Vessels And Reefer Expansion Offers Production Upside BMI believes that the trend of container lines ordering ever larger vessels will have a positive effect on the container manufacturing sector. The launch of Maersk Line's Triple-E Type, for example, would see as many as 18,000 TEUs required per sailing, as due to rotational issues more boxes would be needed in the supply chain. This increase will however be reliant on demand, as in the current climate with an
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increase in vessel lay ups predicted there would not be so much demand pressure for the production of new boxes.
The development in refrigerated container (reefer) technology is seeing lines expand their exposure to the reefer market. The increased demand for reefer services is feeding up the supply chain back to the manufacturers. CIMC's results for January-September 2011 show that, while the production of dry cargo containers has increased by 35.24%, sales of reefer boxes have grown by 126.24% y-o-y.
Reefer Growth Outpaces CIMC January-September 2011 Container Sales (% change y-o-y)
Source: CIMC
Reefer trade opens up opportunities for greater volumes on the back haul of major trade routes, such as on the trans-Pacific, with manufactured goods entering the US from Asia, but fruit, vegetables and meat heading in the other direction. Maersk Line is a major proponent of the reefer sector: Tim Smith, Maersk Line's North Asia head, stated that the company plans to invest more than US$1bn in refrigerated containers over the next two years. The company is already expanding its reefer services, offering two reefer-specific routes from Ecuador to Russia for the transport of bananas.
Containerisation Revolution Rolls Into Dry Bulk In the longer term container manufacturers will, in BMI's view, benefit from the ongoing march of containerisation. The box has revolutionised the shipment of consumer goods and the next logical step is investigating the possibility of shipping other goods via container.
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BMI notes a trend of increasing box usage in the soft commodity sector. The shipment of grain by box (Ag In A Box) has so far been trialled in Russia and the US, while the shipment of soy beans by container, rather than in a dry bulk vessel, was launched in Brazil in August 2011.
There is also the possibility of hard commodities turning to containerisation. Iron ore shipments in Australia were freighted by box on the country's railway network in March 2011, while containerised coal was freighted by rail in South Africa between the mine head and two coal-fired power plants in May 2011.
Containerisation Continues To Stack Up Instances Of Dry Bulk Commodities Being Shipped By Container
Source: BMI
The increased use of containers is understandable, considering that boxes offer considerable logistical benefits, the supply chain for containerised goods is quicker and smoother than that of the dry bulk sector. We therefore believe that the box will revolutionise the shipment of dry bulk commodities globally, just as it did for consumer goods.
The further development of containerisation will obviously benefit the container shipping sector, as more goods will be available for transport. This in turn will benefit container manufacturers: as new cargos use the box, more containers will be required.
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Dry Bulk
Executive Summary
BMI examines the outlook for the beleaguered dry bulk shipping sector, which has been blighted by sinking rates due to crippling overcapacity for the past year. We maintain our view that the continued glut of vessel availability will cap rate gains. While rates experienced an uptick beginning in August 2011, they remain a long way off pre-downturn highs. While scrapping is on the up, this alone is not enough to regain the supply-demand equilibrium. We need to see less ordering of newbuilds, and more idling. For the time being lines remain reluctant to emplyoy these strategies, exposing themselves to the danger of more bankruptcies. As such, our outlook for the sector remains bleak.
In Chinese Slowdown Threat Double Downside Risk To Dry Bulk Shipping we investigate the possibility of a slowdown in Chinese growth, and analyse the potential effects of this worrying scenario for dry bulk shipping lines. BMI examines the demand-side risks to the sector posed by both a the possibility of a slowdown in China's construction sector, and a double dip recession in the US. We have already seen a crippling oversupply of vessels putting sustained downside pressure on rates, despite strong demand. If we also begin to see pressure on rates from the demand side, rates could plumb new lows
In Vale May Find Solace With South Korea As Chinese Troubles Continue we look at the risk mitigation strategy of one dry bulk shipper that is already looking to diversify its demand base; Brazilian iron ore giant Vale. The mining company is taking care not to place all its hopes on China, and is instead developing relations with South Korea, another major iron ore importer. BMI believes that more dry bulk exporters will be following Vale's lead as the possibility of a slowdown in Chinese demand becomes increasingly likely.
In Lines Need To Up Capacity Reduction Strategies To Ease Oversupply BMI examines the strategies lines should be using to reduce capcity and see which companies are doing their bit to ease oversupply. In 2011 we saw rates fall to a low of US$1043 (4/2/11), only to tick up again, reaching US$2136 at the time of writing (18/10/11), still down 81% on the pre-downturn high of US$11709 (18/5/09). This massive drop in rates is due to the current over-availability of tonnage due to the rush to order vessels when rates were at their peak. However, we need to see these tactics employed to much greater effect if lines are to effectively combat the overcapacity that is driving rates down.
In Dry Bulk Lines In Choppy Waters, Possibility Of More Bankruptcies we examine the potential for more bankrupcies in the sector if capacity reduction strategies are not implemented. Sinking rates and disappointing financial results have raised the spectre of more bankruptcies in the sector. BMI looks at
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the strategy of Diana Shipping, one company which has managed to keep its head above the water thanks to its use of long-term charters.
Chinese Slowdown Threat Double Downside Risk To Dry Bulk Shipping

China is the main driver of demand for dry bulk shipping, so the possibility of a slowdown in Chinese growth is a worrying scenario for dry bulk shipping lines. BMI examines the demand-side risks to the sector posed by both a the possibility of a slowdown in China's construction sector, and a double dip recession in the US. We have already seen a crippling oversupply of vessels putting sustained downside pressure on rates, despite strong demand. If we also begin to see pressure on rates from the demand side, rates could plumb new lows
Chinese demand remains the most important driving force behind the dry bulk shipping sector. The Asian Dragon's seemingly insatiable appetite for commodities like iron ore and coal saw rates soar to historical highs prior to the recession, only for them to be obliterated by crippling oversupply in the post-recession period. While demand for dry bulk commodities currently remains strong, BMI cautions that the possibility of a hard landing for the Chinese economy presents considerable downside risk to a sector that is already in the doldrums.
Demand Slowing, But Still Strong Chinese Ores And Metals Imports, 2001-2015 (US$mn)
e/f = BMI estimate/forecast. Source: UNCTAD
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We expect demand for iron ore and coal, the main dry bulk commodities, to remain strong through 2012. While there have been some fluctuations in demand, imports for both commodities have remained well above historical averages throughout 2011. China's coal imports for the first nine months of the year reached 120mn tonnes, up 1.9% year-on-year.
Our outlook for Chinese iron ore imports has moderated slightly, as the government's drive to ease inflationary pressures has eased the pace of construction, in turn resulting in a reduced need for steel production. This is reflected in our Chinese steel production forecasts, which predict y-o-y growth of 3.7% in 2012, down considerably from estimated growth of 6.9% in 2011. Nevertheless, steel production will continue to grow, albeit at a slower pace, reaching 693mn tonnes in 2012, up from 668mn tonnes in 2011.
In line with our moderating steel production view, BMI expects Chinese ores and metals imports to slow from 2011's estimated 25.4% y-o-y growth in value, but we still expect strong demand, with a 16.3% growth in imports predicted in 2012. We also expect sustained demand for the coking coal used in the steel production process. In 2010, Australia, China's biggest coal supplier, exported 155 million tonnes (mt) of coking coal. The US, the next biggest exporter of coking coal, shipped 51mt. While a breakdown of export destinations is not available, we can be sure that much of this went to China, the world's second biggest coal importer behind Japan.
We expect similarly strong demand for coking coal in 2012, which is needed for electricity generation. At present, approximately 80% of Chinese electricity production is from coal. The country's coal consumption has shot up in recent years, increasing by 40% to 3.25bnt in 2010 from 2.32bnt in 2005. We forecast that Chinese demand will outstrip domestic supply, resulting in a shortfall that will have to be met by importing coal from Indonesia, Mongolia, Australia and other coal exporting nations. In 2010 Australia, the world's biggest coal exporter, exported 143mt of the steam coal used in electricity generation, while Indonesia exported 160mt.
Downside Risk 1: A Construction Slowdown While our demand outlook remains positive, we caution that the possibility of a slowdown in Chinese economic growth presents a considerable downside risk to this. Our core view on Chinese growth is that we are past the boom phase and we are entering a period of much weaker expansion, with headline real GDP growth set to fall to 7.5% by 2013. While not an outright collapse, sub-8.0% growth is cause for concern. The main reason we are calling for a sharp slowdown is our belief that the country's investment boom has involved a serious misallocation of capital, and as a result is finally set to be unwound in the near term. Among the recent examples we have seen are the boom and bust of high-speed rail as well as the loss of momentum in the housing market, which suggest that the boom is coming to an end.
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In line with our view, we believe that property prices are set to experience serious downside, which presents considerable downside risk to steel production and therefore dry bulk commodity imports. Construction directly accounts for 54% of Chinese steel usage, and once autos and durable goods are included, its share rises to over 60%. We estimate that this could rise to two thirds once property-related infrastructure spending and the investment in new steel capacity are factored in. We believe that a 30% correction in home prices nationwide is possible. This would have a very negative impact on demand for steel, and therefore on demand for the coking coal and iron ore which are used in its production.
Downside Risk 2: A US Double-Dip Recession Further downside risk to Chinese demand for dry bulk imports is presented by the possibility of a doubledip recession in the US. Given China's dependence on the US as an export market, a sustained slowdown in US consumer demand for Chinese imports and a renewed slip into recession in the US would hit Chinese manufacturers, and therefore wage growth and domestic sentiment. In turn, this would result in reduced demand for power and steel production, with very negative knock-on effects for the dry bulk shipping sector.
Worryingly, US consumer demand remains sluggish. The major US container ports have reported disappointing import volumes during what is traditionally the peak shipping seasons as US retailers stock up for the holidays. August 2011 import volumes at LA and Long Beach, the US' container shipping hubs, fell a worrying 9.4% y-o-y and also slipped 0.7% from July to August. Long Beach's 267,198 20foot equivalent units (TEUs) was a 14.2% decrease from last year, representing the port's lightest month for imports since March. LA's 376,190TEUs was down 5.8% on the same month a year ago.
Consumers Not Splashing The Cash US Real Private Consumption, 2000-2013 (US$bn, base 2005)
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Source: Bureau of Economic Analysis, BMI
The outlook for China's export sector is perhaps the biggest unknown in our view. Currently, Chinese exports continue to grow despite the ongoing economic difficulties in its major export markets. Export growth picked up to 24.5% y-o-y in August 2011, from 20.4% in July, as China's outbound shipments posted their second highest level ever. Exports to the US, meanwhile, hit a new all-time high, despite the US's renewed economic slowdown. Despite the sustained strong performance of China's exports, we continue to believe that a slowdown is inevitable as spending rates in the developed world fall.
Diversification A Limited Mitigation Strategy For Dry Bulk Lines As such, while demand for dry bulk imports currently remains strong, and we do not envisage an outright collapse in the Chinese housing market or a US recession, we caution that dry bulk shippers need to be wary of putting all their eggs in the Chinese basket. We believe some dry bulk shipping companies may begin to look at emulating Vale's strategy of building relations with other major dry bulk importers such as South Korea. We caution, however, that this strategy will not offer a fail-safe protection if Chinese demand really does go down the drain. So far in 2011, we have seen a crippling oversupply of vessels putting sustained downside pressure on rates, despite strong demand. If we also begin to see pressure on rates from the demand side, rates could plumb new lows.
Vale May Find Solace With South Korea As Chinese Troubles Continue
One dry bulk shipper that is already looking to diversify its demand base is Vale. The Brazilian iron ore giant is taking care not to place all its hopes on China, and is instead developing relations with South Korea, another major iron ore importer. BMI believes that more dry bulk exporters will be following Vale's lead as the possibility of a slowdown in Chinese demand becomes increasingly likely.
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Steeling Itself For Growth South Koreas Crude Steel Production, 2004-2015 ('000 tonnes)
Source: World Steel Association, BMI
South Korea And Vale Form Iron Ore Partnership In a move that will put further pressure on already depressed freight rates, STX Offshore & Shipbuilding delivered its first Valemax vessel built for Brazilian mining giant Vale in September. While this vessel will add to the woes of many dry bulk operators, it is good news for STX Pan Ocean, the shipping company which will charter the vessels. By operating these vessels STX Pan Ocean is avoiding volatile spot rates and ensuring a large chunk of cargo for itself, as it transports iron ore mined by Vale in Brazil all the way to South Korea's ore-hungry steelmakers.
Delivery of the first of eight 400,000 deadweight tonnes (DWT) vessels built by South Korea's STX is to take place on September 27. STX has eight Valemax (also known as Chinamax) ships on order with the Brazilian iron ore miner Vale. The eight are being built at STX Jinhae shipyard in South Korea. BMI believes that Vale made a good call in ensuring its strategy was diversified,as its relations with South Korea will protect it somewhat from the effects of the frosty reception its fleet development has received from China. Vale, the world's biggest iron ore producer, has been following a controversial plan to own and operate its own fleet of 19 massive dry-bulk vessels to cut shipping costs from Brazil to China, its top export destination.
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Vale Rethinks Strategy To Avoid Angering The Asian Dragon BMI believes the company has been forced to rethink its strategy after its Very Large Ore Carriers (VLOC) received a frosty reception from Chinese ship owners. Both Chinese ship owners and domestic steel producers have raised their objections at government level over the perceived threat of the mining giant dominating the iron ore shipping market with its fleet of Chinamax vessels. Zhang Shouguo, the executive vice-chairman of the China Ship-owners Association, has called for Vale to engage Chinese shipping companies to run the mining firm's Chinamax fleet, stating 'let the shipping industry do the transport thing', and accusing Vale of 'seeking to control the freight market as it has done with iron ore prices', as reported by Bloomberg. As yet, no Valemax has called at a Chinese port.
Given the Chinese hostility towards its plan, BMI believes Vale has done well to look at partnerships with other ore importing nations. We believe that Vale's partnership with STX Pan Ocean, who are to charter the vessels, will no doubt include an agreement that the vessels must be used to transport Vale's iron ore from Brazil. Any such deal with a South Korean company should prove beneficial to Vale, as South Korea is a major iron ore importer. South Korea's POSCO is the world's fifth largest steelmaker and we estimate that the country will import US$47.85bn worth of ores and metals in 2011, up 35% yearon-year (y-o-y), in order to produce an estimated 72mn tonnes of steel in order to support its strong shipbuilding and autos production industries. Diversifying its strategy by developing relations with other iron ore importers should ensure Vale is not hit too hard by Chinese hostility and also offers it some protection against a possible decrease in Chinese demand.
As yet it is unclear whether South Korea's main port of Busan is equipped with the appropriate dredge and landside equipment to handle Vale's VLOCs. If not, it is possible that STX could take the vessels from Brazil to Vale's iron ore hub in Sohar, Oman, or Malaysia's Lumut where the cargo could then be transhipped on in smaller vessels. Vale's iron ore hubs demonstate that while the company is keen to cater for China's iron ore demand, it has diversified its client base and will cater for Middle East demand via Oman and via Malaysia, demand from Asia.
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Upside Potential South Koreas Ores And Metals Imports, 2008-2016 (US$mn)
e/f = BMI estimate/forecast. Source: UNCTAD, BMI
Still Banking On China BMI notes that Vale hasn't given up on China and is attempting to appease Chinese shipowners by allowing them to operate some of its mega-fleet. The company has announced that it is in negotiations with Chinese shipping lines to sell or lease the VLOCs. 'We don't want to be a major freight operator or make money out of our shipping business', Vale's global marketing director, Pedro Gutemberg, told Reuters. 'We just want to make sure that our freight cost doesn't shoot up. So any person that wants to partner with us is very welcome.' Vale has declined to say with which companies it is negotiating. China's state-owned COSCO Group has denied that it is in discussions with the Brazilian company.
Fortunately for Vale, freight rates are now much weaker than they were in 2008, when much of the fleet was ordered. This means the company does not urgently need to cut its transport costs, allowing it to bend to the will of Chinese shipowners. If a lease is agreed with a Chinese dry-bulk shipper, Vale is likely to sign a long-term contract with the operator, ensuring that the ships will only be used to transport Vale's iron ore. This move would keep both parties happy, as it would protect Vale from the spot market, while providing a significant amount of cargo for a Chinese dry-bulk shipping company at a time when vessel supply is far outweighing demand.
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Lines Need To Up Capacity Reduction Strategies To Ease Oversupply

In 2011 we saw rates fall to a low of US$1043 (4/2/11), only to tick up again, reaching US$2136 at the time of writing (18/10/11), still down 81% on the pre-downturn high of US$11709 (18/5/09). This massive drop in rates is due to the current overavailabiltiy of tonnage due to the rush to order vessels when rates were at their peak. There are a number of strategies which lines can use to control capacity. Idling, scrappage and reducing new orders are all tactics that can be used to combat the glut of vessel supply we are currently seeing. However, we need to see these tactics employed to much greater effect if lines are to effectively combat the overcapacity that is driving rates down.
Heavy Orderbook Weighs On Rates Fleet Orderbook, 2011-2014
Lay-Ups Needed To Reduce Fleet Given the limitations of scrapping, one other option lines can use to regain supply/demand equilibrium is laying up vessels. This was last utilised by the industry to any significant degree at the height of the banking crisis in 2008, when it was also used by the container shipping sector. According to Lloyd's List Intelligence, in January 2011 59 vessels were idled. By August, this number had increased to 65 vessels. However, by September it dropped to just 46 as rates ticked upwards. This is not a satisfactory number if lines wish to make a dent in the current fleet. BMI believes we need to see this number rising quickly in the coming months if lines are to regain some supply-demand balance.
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New Orders Down But Bargain New Build Prices Could Attract Orders Shipbuilders are seeing orders for new vessels drop as shipping lines keep an eye on spending in a climate of global economic uncertainty. BMI believes the slowdown in orders is good news for shipping in the longer term, as the sector has recently been blighted by overcapacity.
The China Association of the National Shipbuilding Industry said new orders fell 29.2% year-on-year (yo-y) to 23.58mn deadweight tonnes (DWTs) in the January-July period. The Japan Ship Exporters Association has reported a similar drop in demand, as ship orders fell for the fourth straight month in August on a y-o-y basis, plunging 74.4% to 346,300 gross tonnes. Japanese export ship orders in the January-August period dropped 23% from a year earlier to 5,891,292 gross tonnes. The drop off in orders reflects a global demand reduction, particularly for dry-bulk ships and tankers, areas in which China specialises, as these sectors struggle with depressed rates due to a sustained supply/demand imbalance.
South Korea has regained its position of having the most new orders in the first half of this year, having won US$37.8bn of orders in the first eight months of 2011, compared with US$10.3bn for China, according to market research firm Clarkson. BMI believes this is because the country can secure deals for large, value-added vessels due to its continued focus on high-end, technically advanced vessels such as liquefied natural gas (LNG) carriers and offshore facilities, which cannot be widely produced.
Newbuild Prices Sink As Demand Drops On the whole, we welcome the drop-off in orders as it reflects the fact that lines are keeping a close eye on their bottom lines. We caution, however, that dropping new build prices as a result of falling demand could attract some of those lines, such as Diana Shipping, that have not been hit hard by the rates decrease. The lower prices indicate that shipbuilders are trying to encourage orders while lines are watching their bottom lines. In August 2010 prices for new-build Handysize, Panamax and Capesize vessels stood at US$27mn, US$35mn and US$59mn respectively. In September 2011 prices had eased to US$24mn, US$30mn and US$51mn.
Yards Determined To Lure New Orders On top of reduced prices, we have been following the trend of shipbuilding nations such as Japan and China continuing their policy of offering credit to shipping lines to encourage them to order. In September, Japan Bank for International Cooperation (JBIC) signed two loan agreements worth a total of US$184mn to finance six dry bulk carriers to be built at Japanese shipyards, four for South Korea's Hanjin Shipping's and two for Turkey's YA-SA Shipping Industry and Trading.
Meanwhile, China is continuing its efforts to establish itself as the world's foremost shipbuilding nation. The Asian Dragon is set to create an investment fund for loans to Greek ship-owners in order to attract their business. Greece has a huge merchant fleet, but in the current climate its ship-owners are struggling to secure funding from their traditional sources in order to expand their fleets. China's plan to set up a
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US$10 fund to offer cheap loans to Greek ship-owners represents an increase on the US$5bn that was pledged in October 2010. Reuters quotes Greece's Minister of Maritime Affairs, Islands and Fisheries Ioannis Diamantidis as stating 'China has pledged that financing terms for Greek companies will be better than those offered by any other bank in the world.' The caveat in the deal is that Greek ship-owners can only access these loans when they order at Chinese yards.
BMI notes that if new-build prices continue to drop, and shipbuilding nations continue to offer attractive financing packages, we will see lines continuing to order despite the current low rates. This is a worrying prospect for the sector given that overcapacity is the single biggest factor causing the rates depression. Although any orders made now will not be due online until the end of 2012 at the earliest, it remains unclear whether the sector will have regained the supply/demand equilibrium by then. Vessels due online in 2012 number 1313, while orders due in 2013 already number 387. BMI believes we could see this number increase considerably if some lines decide to take advantage of bargain new build deals.
Scrapping On The Increase As Lines Try To Mitigate Damage The scrapping of Capesize vessels is increasing as dry-bulk shippers try to gain some control over spiralling overcapacity that has kept the Baltic Dry Index depressed throughout 2011. Although an increase in scrapping should ease overcapacity somewhat by taking older vessels offline, BMI cautions that the global fleet is still quite young, and as such scrapping is not a panacea for the sector's woes.
As of October 2011 the latest scrappage deals to have been announced involve Tech Project's 166,000 deadweight tonne (DWT) V Australia (built 1984), which will be scrapped in India having been sold for US$13.97mn, and Greece's Good Faith Shipping, which sold its last Capesize, the 132,000DWT Riva (built 1981), to a Bangladeshi scrap yard for US$9.2mn. There are also reports that the 152,000DWT Shen Non 2 (built 1991) has been sold domestically in China for US$12.3mn. According to reports, these latest deals bring to 62 the tally of Capesize vessels have that been scrapped so far this year.
Given that Capesize vessels have an average size of about 160,000DWT, this means about 9.9mn DWT have been scrapped so far this year. If scrapping continues at the same rate, by the end of the year we could see up to 83 Capesize vessels scrapped, with the result that 13.2mn DWT will have been taken offline.
High prices for scrap steel have undoubtedly encouraged scrapping. Rising steel prices mean that owners are faced with higher steel-strengthening costs for older vessels. With scrap prices surging, owners are therefore even more willing to send their older vessels to the scrap yards. As mentioned above, in some cases in 2011 Capesize bulkers have been sold for scrap for more than US$12mn, a figure that it could take a Capesize vessel three years to earn on the spot market based on average daily earnings in 2011.
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Overcapacity Threatens Capesize Tonnage Delivered By Year, 2000-2011 (dwt)
Source: Lloyds List Intelligence
Scrapping Is A Limited Tool To Ease Sector's Difficulties Although BMI notes that scrapping is a positive step in the fight against overcapacity, we believe that even if this high level of scrapping is maintained, it will not be enough to offset the negative effects of the influx of tonnage due online this year. According to Lloyd's List Intelligence, as of August 1, there are 1,152 vessels due online in 2011, equating to 92.88mn DWT, or 16% of the current global fleet of 224.52mn DWT. As such, scrapping 13.2mn DWT will barley make a dent in the fleet, and still leaves the sector dealing with a net influx of 79.68mn DWT.
As a capacity-control mechanism, scrapping is further limited by the fact that in general only vessels over 20 years old are sent to the scrap yards. Currently, 115mn DWT, or 20% of the global fleet, is over 20 years old. Even if all of this tonnage is scrapped, the fact that we are expecting a further 92.88mn DWT to come online this year would offset the benefits from this.
Dry Bulk Lines In Choppy Waters, Possibility Of More Bankruptcies

Sinking rates and disappointing financial results have raised the spectre of more bankruptcies in the sector. BMI looks at the strategy of Diana Shipping, one company which has managed to keep its head above the water thanks to its use of long-term charters.
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With rates still in the doldrums, BMI believes the possibility of more dry bulk shipping companies going bankrupt, as Korea Lines did in early 2011,cannot be ruled out. Disappointing H111 results from many lines indicate a repeat of this scenario remains a possibility. However, despite the difficulties faced by most companies in the sector, Greek line Diana Shipping is weathering the storm well.
Diana Triumphs In H111 As COSCO Falters Dry bulk shipping companies reported losses across the board for Q211 and H111 as a glut of capacity maintained strong downward pressure on rates. Greek based Dryships recorded a net loss of US$114.1mn for the three months ended June 30 2011, compared to a net income of US$19.5mn for the same period in 2010. Excel reported voyage revenues for the second quarter of 2011 amounting to US$92mn, a decrease of approximately 14% from the US$107mn reported for the same period in 2010. Net losses for the quarter amounted to US$16mn, down from a net profit of US$78.9mn in Q210.
Rates In Choppy Waters Baltic Capesize Index, Five Years
Source: Bloomberg
The loss that caused the biggest waves in the sector was that of Chinese state-owned line COSCO. COSCO's dry bulk shipping unit lost US$487mn in H111 as excess capacity depressed rates, volumes dropped 2.6% and revenues plunged 27% to US$1.9bn. In a worrying development, COSCO had three lawsuits filed against it as shipowners pursued overdue payments. While all the disputes have since been resolved, the non-payment of charter fees suggests all is not well with the company. In September Swiss agribulk giant Bunge filed suit to recover US$294,252 in charter fees and costs from the COSCO Bulk Carrier division for the Capesize Yu Lan Hai. Two other Capesize vessels were impounded in Singapore
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and Louisiana. While at the time of writing COSCO had resumed payments, the company's woes reflect the fact that the dry-bulk shipping sector has been performing dreadfully since the global economic crisis. Over the past 12 months, the index has fallen by 47.1%, with Capesize vessels bearing the brunt of this decline in rates.
Despite the general malaise in the sector, Diana Shipping has defied the odds by continuing to report profits at a time when its competitors have been experiencing significant losses due to the rates depression. Diana Shipping reported net income of US$27.7mn for the second quarter of 2011, compared to net income of US$33.9mn in the second quarter of 2010. Net income for H111 amounted to US$60.8mn, compared to net income of US$62.7mn for the same period of 2010. Time charter revenues were US$134.1mn for the period, up from US$130.9mn for 2010.
Long Term Charters Key To Success In such a difficult climate, how has Diana Shipping managed to keep its head above water? BMI believes that Diana's key to success has been its long term time-charters, many of which were signed in the prerecession period when dry bulk shipping rates were at their peak. The company's most lucrative charter agreement is with Corus UK, which rents a 2002-built Capesize from Diana at a gross rate of US$74,750 a day. The vessel was delivered to Corus on 12 February 2008, before rates were hit by the global downturn, and the agreement does not end until 2013. Another high earner for the company is its 2007 deal with Refined Success, under which it earns US$55,800 a day for chartering out a 2005-built Capesize. The agreement ends in 2013. Long-term charters like these guarantee a predictable and steady source of income, unlike offering vessels at the spot rate, and have been bolstering the company's profits while its competitors suffer. Diana's vessels each earned an average of US$30,597 during Q211, considerably up on Dry Ships' average of US$18,932.
Even in the current climate, Diana Shipping is still managing to attract long-term time charters. In October Diana announced the latest rates it has secured for its two Newcastlemax dry bulk carriers, the MV Los Angeles and the MV Philadelphia, both of which are currently under construction. The client, EDF Trading Limited, London, has signed up for around 4 years, chartering each ship at a daily rate of US$18,000. Diana has also announced that it has entered into a time charter contract with Louis Dreyfus Commodities for a 2005 Panamax carrier, the MV Calipso, at a gross rate of US$12,250 per day for a minimum 22-month to a maximum 26-month period. The charter is expected to commence in midOctober 2011. This employment is expected to generate approximately US$8.1mn of gross revenues for the charter's minimum scheduled period.
BMI cautions, however, that Diana will have to take a hit when some of its high-earning time charter agreements come to an end, and the vessels must be chartered out under new agreements under which they will earn considerably less. A clear example of this is the company's deal with South Korean line Hanjin, which paid a gross rate of US$59,000 per day for the 2004-built Panamax vessel Protefs, which
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it chartered since 18 September 2008. However, the agreement with Hanjin ended in August 2011, and the Protefs is now chartered out to Cargill International for two years at the rate of US$11,750 a day - a rate reduction of 80%.
Barely Staying Afloat Excel Maritime And Diana Shareprices, Three Years
Source: Bloomberg
Stock Prices Reflect Widespread Bearish Sentiment Despite the fact that the company is outperforming its competitors in terms of results, its stock price still reflects the widespread bearish sentiment towards the sector. Diana had hit a new 52-week low at the time of writing as it traded at US$7.09, well below its previous 52-week low of US$7.42. While Diana is doing considerably better than its Greek competitor Dryships, which is currently trading at US$1.99, the company's shares have plummeted 38.3% year-to-date as of the close of trading on 29 of September. Given the ongoing rates depression, BMI is unsurprised by this. With new tonnage coming online all the time, the vessel glut is not easing up and there is no rates recovery in sight. Diana's stock price reflects the uncertainty surrounding the sector's future.
Things To Get Worse Before They Get Better? The combination of depressed freight rates due to overcapacity and the possibility of a drop-off in demand from the world's major dry-bulk importer paints a worrying picture for the dry-bulk shipping sector. Unfortunately, lines are making only limited efforts at risk mitigation, raising the prospect that rates will remain in the doldrums for some time to come. We believe the trouble faced by dry bulk giant
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COSCO in Q311, when lawsuits were filed against it for non-payment of charter fees, could become an increasingly common scenario in the sector as it sinks under the weight of oversupply.
Liquid Bulk
Executive Summary
BMI has a very bearish outlook for the global crude oil shipping sector in 2012, particularly toward companies with significant numbers of very large crude carriers (VLCCs) in their fleets, and especially those operating on the spot market. The global crude oil tanker sector is in crisis. Like the container and dry bulk shipping sectors, tanker operators are struggling against the effects of overcapacity. Vessels ordered during the pre-downturn boom years have continued to come online through 2011 despite the continued decline in rates, worsening the problem still further, and will continue to do so through the coming years.
In the Liquid Bulk Overview Q1 2012 we examine the global supply and demand outlook for crude oil and crude oil shipping, and outline what we expect will happen in 2012 and beyond. The first chapter is entitled Dirty Tanker Indices Not Very Buoyant, and in it we explain why we are bearish towards the Baltic Dirty Tanker Index and other indices in 2012, and examine their performance in 2011.
In Differing Strategies, Differing Fortunes, we examine how the world's two largest tanker operators, Frontline and Teekay have had different levels of success in 2011 as a result of their different modi operandi, and explain how we believe this will continue in 2012 as they maintain their positions. While Frontline operates largely in the spot market, Teekay ensures a certain level of time chartered tonnage in its fleet.
In the following chapter, Genmar Bankruptcy Just The Beginning, we project that smaller companies will increasingly declare themselves bankrupt in 2012 as they face similar challenges to Frontline, only without the large company's financial backing. Marco Polo Seatrade has already declared itself bankrupt, and General Maritime Corp (Genmar) has warned investors that it may have to do the same.
There are a number of methods by which operators can seek to protect their bottom lines in 2012, and these are examined in Survival Strategies For Floundering Tanker Operators. These include slowsteaming, laying-up and scrapping, the most drastic method, but also the one most likely to work.
However, in the following chapter we note that a Rumoured Chinese Order Has Potential To Sink Crude Oil Shipping Sector as the huge glut of VLCCs it would bring onto the market in the mid term would cause rates to plummet.
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Dirty Tanker Indices Not Very Buoyant

Baltic Dirty Tanker Index Sinking Year-On-Year BMI believes that the outlook for crude oil tanker operators in 2012 is a gloomy one. The Baltic Dirty Tanker Index, which is made up of a composite of crude oil tanker routes, saw a fifth consecutive weekon-week (w-o-w) gain on October 14, rising 6.3% from US$777 on October 7 to US$826. However, BMI believes that rates will stay far below their pre-downturn levels in 2012, thanks to continuing oversupply in the global tanker fleet. In July 2008 the index hit its five-year peak of US$2,347; the 2011 year-to-date average on October 14 was US$775.3, and we are unoptimistic as to whether 2012 will be much greater than this.
2008 Highs A Distant Dream Baltic Dirty Tanker Index (US$)
Source: Bloomberg
Oil Supply And Demand BMI predicts global oil demand growth of 1.9% in 2012, and that this will average 1.9% per annum to 2016. This growth forecast will be of concern to tanker operators, as the growth in the global tanker fleet is expected to far exceed that. According to Lloyd's List Intelligence, the orderbook for 2012 stood at 28.73mn deadweight tonnes (DWT) on September 1 2011. If there are no cancellations or slippages then this will see 8.5% of the current fleet (336.23mn DWT) come online.
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Longer term, growth in crude production in countries such as Angola, a long way from any major importers, will be heartening to the industry as the tonne-mile from transporting this crude will be considerable.
US Demand Not To Be Counted On BMI believes that our revised-down real GDP growth forecast for the US in 2012 does not bode well for the global crude oil shipping sector.
The US is still the world's biggest importer of crude oil. Although it is true that a considerable proportion of this oil is imported via pipeline from its North American neighbours Mexico and Canada, there remains a considerable quantity that must be transported from overseas. From January to July 2011 the US imported 1,155 barrels a day (b/d) from Saudi Arabia, and 864 b/d from Nigeria, in addition to imports from Iraq, Angola, Kuwait and numerous other countries which provide a good tonne-mile to the tanker industry.
However, BMI notes that the US's monthly oil imports (to July, last available data) were down year-onyear (y-o-y) every month in 2011 save January. In July 2011 361.69mn barrels were imported, down 7.9 from 392.92mn barrels in July 2010. This can be partially explained by the release of emergency stockpile oil by the International Energy Agency in June, in response to ongoing crises in the Middle East and North Africa region, in particular Libya. We believe the primary cause remains sluggish US growth, however. Our US growth forecasts have been revised down to 1.6% (from 2.4%) in 2012. There have been decidedly mixed data emerging from the US for several months, including a disappointing Q211 real GDP figure of 1.0% quarter-on-quarter (q-o-q) annualised, which is well below potential. There is significant debate at this stage as to whether the US is in danger of falling into recession, but we believe that although growth is certainly weak, it can be expected to remain in positive territory through the remainder of the year. However, the US will remain vulnerable to shocks, particularly to any bad news on the eurozone fiscal front.
The effect of this on the tanker operators has been insufficient demand from the US to absorb the overcapacity in the tanker market. According to ICAP Shipping, one of the two benchmark routes we track, Tanker Dirty Route 5 (TD5), has been in doldrums so far in 2011, and we expect this to continue into 2012. Daily returns (what a tanker operator on this route can expect to make each day) on the TD5 Suezmaxes from Offshore Bonny, Nigeria, to Philadelphia, US - averaged just US$11,066 from the start of 2011 to October 13. In September rates fell well below US$1,000, though they had picked up to US$26,547 in mid-October. Looking at 2012, BMI believes a marked increase in US crude imports, or a marked decrease in the number of vessels plying the route, would be needed to push rates back up significantly. Given our Country Risk team's outlook for the US economy, any lasting increase seems unlikely.
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China Some Solace, But Vessel Class Woefully Oversupplied BMI believes that as the Western markets struggle to maintain growth the tanker operators will increasingly turn to the East for solace. However, the Asian markets are those on which the very large crude carriers (VLCCs) are most prevalent. VLCCs are the vessel class suffering the most from overcapacity, as the attractive returns they generated during the pre-downturn boom years caused a rash of ordering before the economic crisis hit. Operators have been making losses and running the vessels on negative daily returns in 2011, and BMI expects this to continue in 2012.
After the US the world's second biggest importer of crude oil is China, after having overtaken Japan in 2008. In 1993 China was importing 69,500 barrels of oil a day (b/d). By 2000 this had risen to 1.55mn b/d, and in 2010 to an estimated 4.83mn b/d. By 2015 we forecast that Chinese oil imports will hit 6.69mn b/d, a growth of 38.5% in just five years, and 331.6% greater than in 2000.
The benchmark route for crude oil being shipped to the East is the Tanker Dirty Route 3 (TD3), which tracks daily returns on very large crude carriers (VLCCs) from Ras Tanura, Saudi Arabia, to Chiba, Japan. On October 13 daily returns on the TD3 were in negative figures, having dropped to -US$2,423. This is a far cry from the record US$229,000 achieved in 2007, and a sizeable drop from even the y-t-d average on that date, US$11,066.
BMI notes that it was these massive returns on VLCCs in the boom years that are contributing to their downfall now. Speculators ordered vessels hoping to see similar profits, only for the global recession to reverse, stall and then slow global oil imports. Some forecasts put the growth in the global VLCC fleet at around 10% in 2012. As examined later in this special report, we do not expect this situation to ameliorate significantly unless something drastic - considerable scrapping seems the tactic most likely to have any significant effect - is done to the supply side.
Elevated Bunker Costs Make For A Double Whammy On Operators' Bottom Lines BMI notes that returns on all routes will have been diminished by the increase in bunker costs that occurred this year. Tanker operators have been struggling in 2011 as a result of both sunken rates and elevated fuel prices, on the back of the rise in the global oil price caused by Middle Eastern and North African unrest. The Bunker World Index (BWI), an average taken from 20 key global bunkering ports, started the year at 1,187 before rising to 1,558 on August 1, a gain of 31.3%. On October 13 it stood at 1,506; BMI believes the bunker costs will continue to decline through the remainder of 2011 and into 2012, in line with our outlook for global oil prices. They remain elevated, however, and a significant cost for tanker operators, even given the current trend for slow-steaming.
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Rise Of Bunker Costs Hit Tanker Operators Bunkerworld Index
Source: Bunkerworld
Differing Strategies, Differing Fortunes

BMI believes that the two largest tanker operators in the world, Frontline and Teekay Tankers , will have differing fortunes in 2012, as a result of their differing market strategies. Frontline's high exposure to the spot market will leave it exposed to the ever-worsening rates, caused by an excess of tonnage as compared to demand, particularly in the very large crude carrier (VLCC) sector, in which the operator is concentrated. Teekay Tankers, however, ensures that it has an even mix between vessels operating on the spot market and those in fixed charters, protecting it somewhat in times of poor returns. Though this can mean it misses out when the market is in a period of high returns, BMI does not expect this to be the case in the mid term unless something drastic is done to improve the global supply demand dynamics in the tanker fleet.
In essence we believe that the differing fortunes experienced by the two companies in the first two quarters of 2011 will continue into 2012 as they stick to their traditional strategies and the difficulties currently facing operators are likely to remain unchanged (or exacerbated). Frontline and Teekay's Q211 reports show a loss and a profit respectively. BMI believes that, though there are also other factors at work (the sale and purchase of vessels, for instance), the loss made by Frontline can be attributed to its reliance on the spot market. In contrast, Teekay Tankers ensures a certain level of time charter contracts for its fleet to protect itself against any serious downturns. Teekay Corp as a whole has benefited from exposure to other growth areas in liquid bulk shipping, in particular its offshore division.
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The second half of 2011 is unlikely to have changed these positions greatly. Rates have continued to drag, with frequent periods of negative returns on the benchmark VLCC route from Saudi Arabia to Japan, and below-par returns for Suezmaxes crossing the Atlantic. In 2012, and even further into the mid term, BMI believes that tanker operators will continue to suffer, and none more so than those, like Frontline, exposed to the suffering spot market. Teekay Tankers' strategy will continue to serve it well as it has fixed charters on its books for some months yet.
Frontline Frontline released its financial results for the second quarter (and first half) of 2011 on August 26, with both periods showing a net loss for the company. The results do not surprise BMI given the parlous state of the global crude oil shipping sector, which continues to be plagued by an excess of tonnage and insufficient demand to absorb it. Operators' bottom lines have been further affected by the rise in bunker fuel prices.
That Sinking Feeling Frontline's Financial Results
Source: Frontline
The company's revenues were down 34% from US$687.94mn in H110 to US$454.21mn in H111. The net loss attributable to Frontline for the period was US$19.78mn, a massive drop from the US$160.99mn made in the corresponding period the previous year. The loss for Q211, ended June 30, was even greater at US$35.24mn (compared with a profit of US$81.31mn in Q210), though this was partly offset by the profit made in Q111. Much of the loss was attributed by Frontline to a loss on the sale of assets, amongst other factors. However, the company also made a net operating loss of US$1.06mn.
The cause of the fall in revenue can be seen by looking at the average daily earnings for the company's vessels, the majority of which are very large crude carriers (VLCCs) or Suezmaxes. For Q211 the average daily time charter equivalent (TCE) rates for VLCCs and Suezmaxes in the spot and period markets were US$26,100 and US$15,800 respectively. These were US$46,600 and US$31,000 in Q210, meaning the average for the two classes had fallen by 44% and 49% respectively. The company said operating income
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was also hit by a massive increase in bunker costs: 'Bunkers at Fujairah averaged US$657/tonne in the second quarter of 2011 compared to US$600/tonne in the first quarter of 2011', an increase of 8.7%.
The fall in spot rates has affected Frontline in particular as the company's strategy is built around maintaining a large exposure to the market. Only a small percentage of the operator's double-hulled vessels are in fixed charter coverage, though any remaining single-hulled vessels and OBO vessels in Frontline's fleet are in fixed charters. The company said: 'This provides some downside protection in the current weak tanker market as well as preserving upside opportunities from the spot trading vessels in a strong tanker market.' BMI notes, however, that Frontline's spot-exposed business is too large to be protected by its fixed coverage vessels in operating conditions as inhospitable as those currently found in tanker shipping: 'Based on the high spot exposure for the double hull fleet we are hit by the current low spot rates.'
Nevertheless, BMI does not expect Frontline to move away from a strategy that has served it so well in the past and look to put its vessels into fixed charters. Instead it will operate within the constrained spot conditions as best it can, following a policy of what CEO Jens Jenssen has termed 'commercial waiting' for the bookings it considers worthwhile, and wait for the spot market to pick up again.
Teekay Tankers Teekay's revenues for Q211 were US$31.43mn, only slightly less than the US$31.74mn reported in Q111. In contrast to Frontline, Teekay Tankers reported a net profit for Q211 of US$4.3mn. Though considerably less than the US$7.6mn net profit in the corresponding period of 2010, this is to be expected given the decline in rates since then. The company attributed the decline to 'lower realised average tanker rates for our spot fleet.' The average TCE earnings on Teekay Tankers' vessels have fallen at a similar rate to those experienced by Frontline. During the quarter the average TCE spot rate for an Aframax vessel was US$16,348. Although this was up on Q111's US$16,299, it was down y-o-y from US$19,928.
BMI notes, however, that Teekay follows a different strategy from that of Frontline in that around 5060% of its fleet is in fixed charters. This ensures that the company covers its cost in a safe manner with one half of the fleet while the other is free to pick up the high returns should spot rates suddenly climb. President of Teekay Tankers, Bruce Chan, said: 'Teekay Tankers continues to benefit from its fixed-rate coverage of approximately 60% through the second half of 2011 and 55% through the next 12 months.'
The two different strategies adopted by Frontline and Teekay Tankers have their respective pros and cons. We expect Frontline to continue to suffer, for the time being, with spot rates so dismally low and continued overcapacity expected for some time to come. The size of the company, however, and the fact that it does so well when rates are high, should see it weather the storm successfully. Indeed, the company has been talking of making acquisitions. Other, smaller companies with such high exposure to the volatile spot market will not fare so well in the current climate.
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The Effect Of The Different Strategies Frontline And Teekay Tankers Share Prices On The NYSE (US$)
Source: Bloomberg
Genmar Bankruptcy Just The Beginning

Key Views Following from our piece Differing Strategies, Differing Fortunes, in which we highlighted how large tanker companies such as Frontline have been struggling in the adverse operating conditions crude oil shipping, the decline in rates projected for 2012 increases the likelihood of smaller companies going bust.
The tough operating conditions in the liquid bulk sector are beginning to make life difficult for tanker operators. Q211 results for companies involved in the industry have been red all over, and the sector is beginning to see its first casualties. While the bigger companies such as Teekay and Frontline may have the reserves to weather the storm, smaller companies are beginning to feel the pinch, with insolvencies picking up pace. To date, the filings for bankruptcy have been largely confined to these smaller outfits; the risk is rising, with General Maritime Corp (Genmar) issuing a warning regarding potential bankruptcy procedures. BMI expects the industry will see many companies having to default on their debts as the overcapacity crisis in the tanker fleet continues, and that a more consolidated tanker fleet will emerge as companies undergo mergers and acquisitions.
Marco Polo Flounders We expect the situation of failing companies to intensify in 2012, as we have already seen companies go to the wall in 2011. Netherlands-based Marco Polo Seatrade and related companies, which include the
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Saarland Shipping Management, operator of vessels in the Handytankers and Aframax International pools, filed for Chapter 11 (bankruptcy procedures in the US) on July 29 2011. In a press release, the company cited the 'low freight incomes caused by the decline of the global vessel market and the market in general in late 2008, which impacted the Company's financial situation.' Unable to formulate a debt restructuring plan with its lenders, Marco Polo filed for bankruptcy, from which it hopes to 'emerge as a stronger, more competitive company.'
In its court filing, Marco Polo said it had been forced into the action following an attempt by Credit Agricole (CA) to arrest three of its six vessels on behalf of its creditors. The bank had arrested one and was attempting to arrest the two further ships when the petition was filed in the US. In court papers from August 2, CA stated: 'These bankruptcy proceedings are a sham perpetrated by these Dutch debtors, who have no actual connection with this jurisdiction, to harass Credit Agricole and attempt to thwart its ability to realize on its secured interest in its collateral.'
And More Likely To Follow Another tanker operator looks close to filing for bankruptcy, issuing a warning to that effect on October 3, and we believe this is indicative of what will happen in 2012 and beyond. General Maritime Corp (Genmar) has had a troubled 2011. The New York-listed tanker operator was formed in 1991 and has grown over the past two decades to its current size, operating a fleet with a combined capacity of over 5mn deadweight tonnes (DWT).
This is made up of over 30 vessels, including seven very large crude carriers (VLCCs) as well as a number of Aframaxes and Suezmaxes, all double-hulled with an average age of eight years. The company underwent a merger with Arlington Tankers in 2009, followed by the acquisition of Metrostar Tankers in 2010, which helped it reach this size. The expansion also increased Genmar's debt, however. As the market for crude oil tankers has not improved in the meantime, with rates continuing to tumble, Genmar has struggled.
In August 211, Genmar was warned by the New York Stock Exchange, the bourse on which it is listed, that it is no longer in compliance with its listing standards. The warning came as a result of the company's share price slipping below the NYSE's minimum requirement. On the day of trading following the announcement of the NYSE's notification to Genmar, its share price fell by 12.1% and has continued on its downward trajectory since, leaving little room for optimism with regards to its continued listing.
With quarterly results showing losses, no dividends to be paid for at least another 18 months (the company announced it was halting its dividends for a minimum of two years when revealing its Q410 results in March 2011), and the outlook for tanker operators gloomy to say the least, we do not believe Genmar will appear an attractive buy, and that the company will struggle to avoid delisting. The operator is also likely to face continued problems arising from a US$200mn loan it took from hedge fund Oaktree
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Capital, the conditions of which were described by advisory firm Institutional Shareholder Services as 'thin gruel served cold'. Genmar's woes continued in September when international credit ratings agency Moody's Investors Service downgraded its ratings by three notches.Potential Bankruptcy Filing In October it became apparent that the measures taken by Genmar may yet not prove enough to prevent it from having to file for bankruptcy. The company has made a number of revisions to its loans and credit facilities, which have been approved by Oaktree. According to Tradewinds, these 'waive covenants related to minimum cash, cash equivalent and revolver availability requirements through November 10, though the deal would collapse if the event of default.' However, despite these revisions, Genmar issued a statement laying out the possibility of bankruptcy.
Underperforming Bloomberg Tanker Index And General Maritime, Rebased 36 Months
Source: Bloomberg
BMI is not currently optimistic as to Genmar's chances of avoiding a Chapter 11 filing. Although the Baltic Dirty Tanker Index has been climbing through the end of September and start of October, the outlook for the sector remains extremely bearish for 2012, especially those operators exposed to the VLCC spot market. Without concerted scrapping, or an unexpected spike in crude oil demand, it seems unlikely that Genmar's returns will pick up sufficiently for it to manage its debts. As the crisis for tanker operators continues, BMI expects that more companies will find themselves in a similar situation to Genmar and Marco Polo Seatrade and that bankruptcy filings will pick up through 2012.
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Ongoing Losses Genmar's H111 And H110 Results
Source: General Maritime Corporation
Survival Strategies For Floundering Tanker Operators

From looking at the financial results of tanker operators in 2011 there is little doubt that they have been struggling (and often failing) to maintain their bottom lines, and BMI expects this to continue through 2012 as overcapacity will continue to be an issue and bunker costs, though falling slightly, remain high. In light of this BMI believes that companies involved in the transportation of crude oil should be desperate to ameliorate their business environment, which means trying to bring the level of supply back down. There are a number of means through which this can be achieved. Slow steaming has already become the industry norm, and we expect that this will continue in 2012, and we also project an increase in vessels being put into lay-up rather than operate for negative returns. However, the most certain method through which the excess of tanker supply can be achieved - scrapping - is also the most drastic, and the one operators are loath to undergo. BMI expects that tanker operators will increasingly turn to laying up vessels in 2012, but that the only true remedy will be a permanent reduction in the available tanker fleet. If this is not forthcoming, then a period of consolidation will emerge as smaller companies struggle to stay afloat and larger companies look for bargains.
Slow-Steaming BMI expects that slow-steaming and ultra-slow-steaming will continue in 2012 as it has become common practice for tanker operators in today's market, just as it had for container shipping companies during that sector's nadir of 2009. The practice takes tankers out of the supply equation for longer, and could help to push up, or at least maintain, rates through the year.
Maersk Tankers and Frontline are two major companies to have declared they are slow-steaming, with Frontline running vessels on ballast journeys at just nine-10 knots. According to London-based shipbroker Gibson , a VLCC travelling at nine knots typically consumes around 30 tonnes of fuel a day, compared to around 55 tonnes when travelling at 13 knots. Given the fact that bunker costs have risen some 30% since the start of 2011, this has obvious cost saving benefits for the shipping companies.
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According to Gibson's analysis, the practice enables operators to save 'around US$200,000 on a VLCC ballast leg from Japan to the Middle East.'
More importantly, however, is that slow-steaming has the added benefit of considerably reducing the available fleet for hire at any one time, pushing rates up. According to Gibson, slow-steaming could account for some 10-15% of the fleet. However, the shipbroker points out that any gain in rates would be eradicated if operators simply increase their speeds to chase business as soon as the market picks up. Although high oil prices may make the practice seem especially attractive to operators right now, BMI does not believe any crude oil transporter would pass up a potentially lucrative contract by maintaining a reduced speed. So while slow-steaming will help maintain rates in 2012, BMI does not see it as a permanent remedy.
Idling And Laying-Up Another potential method of reducing supply is the laying-up of vessels. In 2012 BMI projects that more VLCCs will be put into lay-up as owners become reluctant to continue operating for negative daily returns. Laying-up is an extended version of the enforced idling that has become common in the tanker market, especially at the larger end of the scale. As vessels become available, but have no new charter to engage them, they are termed idle as they wait for new bookings. According to Peter Sand, chief shipping analyst at the Baltic and International Maritime Council: 'The period of time for which oil tankers are idled, without employment or waiting to take on a cargo is growing.' In September 2011, the last available data from Lloyd's List Intelligence Unit, the total deadweight tonnage (DWT) of idled oil tankers stood at 8.77mn, a 9.9% gain year-on-year (y-o-y). The previous month's count of 9.23mn DWT was 11.5% greater than the 8.28mn DWT idled in August 2010.
Frontline has been engaging in what it terms 'commercial waiting'. Rather than laying-up, the operator prefers to wait for a charter with returns it deems sufficient than take anything it is offered.
In October, Singapore-based BW Maritime announced the temporary idling of the BW Lotus and the BW Peony, two of its 15 VLCCs, and plans to lay-up a third, the BW Stadt, for an extended period. The company's CEO, Andreas Sohmen-Pao, told Bloomberg: 'In the short term we are holding them back because we feel rates are two low.' We note that laying-up can effectively reduce the global fleet, without having to resort to the drastic measure of scrapping. Sand said that 40-50 VLCCs would need to be idled for the supply and demand equilibrium to be returned. However, BMI believes companies are unlikely to want to do so going into the northern hemisphere's winter, as the mothballing of a vessel could mean missing out on potential business. Further - as with slow-steaming - operators will put these vessels back on the market when rates begin to pick up, and through doing so, returns will begin to fall once again. We acknowledge, however, that this is a longer process than simply returning from slow-steaming to regular speeds.
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Idling Up Idled Vessels (nn dwt)
Lloyd's List Intelligence Unit
Scrapping Scrapping is therefore the potential saviour of the crude oil shipping sector in 2012. However, BMI does not believe this scenario is a likely one. The problem with scrapping tankers in the current market is that the vast majority of them are not very old. During the downturn in 2009, tanker operators engaged in the scrapping of vessels, and through doing so managed to avoid the annus horibilis experienced by the container shipping sector. The scrapping of single-hulled tankers was largely completed, and a number of older (generally 25 years-plus) double-hulled vessels were taken out of service as well.
Companies do not want vessels on their books generating expenses but no income, so it makes sense for the vessels to be sold or scrapped if they can generate some revenue. The resale market for tankers is currently very poor, given the glut of tonnage already afloat and the low cost of new-builds at the shipyards. The cost of a five-year old VLCC on the resale market stood at US$82mn in September, a 3.7% decrease from US$85mn in January, according to Lloyd's List Intelligence. A September 2 report by HSBC Shipping Services put the resale value of 20-year old VLCCs at US$16mn, less than the US$17.5mn such a vessel would generate as scrap in Bangladesh. This is good news for operators' returns, as any vessel that is scrapped rather than resold will help reduce supply.
The HSBC report stated: 'The door is now open for the scrapping of supertankers in the 15-20 year age range.' According to a report by shipbroker CR Weber : 'Since the start of September, the average age of
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demolition units has dropped to about 23 years with 5 units built in the early 1990s being sold for demolition (four of these being double hull units).'
All Scrapped Out Global Tanker Fleet Age, mn DWT
Comments by Frontline CEO Jens Jensen when discussing the company's Q2 results have been interpreted as a call for the scrapping of all VLCCs over 15 years old, as oil majors are less likely to charter these vessels. While the age of vessels being sent to the scrapyards is falling, however, BMI does not believe this would be sufficient to significantly drive up rates. To September, only 5.8mn DWT had been scrapped, compared to 14mn DWT in the whole of 2010. This included seven VLCCs, compared to 18 VLCCs in 2010. Operators are unwilling to scrap vessels that may have some years of good service left in them, and the scrapping of all vessels over 15 years of age (while it would eradicate oversupply and generate some much needed capital) is extremely unlikely to happen; the cooperative effort would be impossible to coordinate. We note that Frontline has no VLCCS of over 15 years in age.
Consolidation BMI believes that a period of consolidation will emerge in 2012. The above stratagems are the possible methods by which to address the imbalance between supply and demand in the tanker fleet, and in particular the VLCC fleet. None of them are perfect, however, and BMI does not believe that any of them are likely scenarios. In light of this, it seems probable that a period of mergers and acquisitions will ensue in 2012 and beyond, with a more consolidated tanker sector emerging. Frontline's owner, shipping magnate John Fredriksen, has been vocal about the fact that the world's largest tanker operator will look
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to come out of this trough an even larger company. Furthermore, the company's CEO, Jens Jensen, has previously said : 'Normally you get the best deals in bad markets.' At the end of September he told Reuters that discussions were underway between companies regarding consolidation, though he would not say whether or not Frontline was involved: 'Hopefully, ship owners will now begin to consolidate a bit and establish more pools to take tonnage out of the market. This is the only way we can change the market as quickly as possible.'
Tankers Tanking While Gas Floats Teekay Tankers And Teekay LNG Partners, Rebased 12 Months, NYSE
Source: Bloomberg
BMI notes that the opportunity to expand rapidly through the acquisition of a struggling company for a low price in a depressed market can be attractive to tanker operators confident that they are sufficiently buoyant to be able to take on the debt. However, we would caution that Genmar is in its current predicament partly through struggling to cope with the financing it took on in order to merge with Arlington Tankers in 2009, followed by the acquisition of Metrostar Tankers in 2010. While Frontline is unlikely to find itself short of avenues for finance, Genmar's experience should sound a note of caution to smaller companies that the crude oil shipping sector sails on stormy seas.
Diversification BMI also expects to see more tanker operators diversifying their operations in 2012, in a bid to capture some of the growth markets in LNG and offshore shipping. Some orders for crude tankers at shipyards have been changed to orders for LNG carriers. Both of these sectors are benefiting from ever-more ambitious methods of extracting and transporting fossil fuels. Teekay Corp has benefited from its
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exposure to both of these markets, through its subsidiaries Teekay LNG Partners and Teekay Offshore. Our bullish sentiment is one shared by investors: when Teekay LNG and Teekay Tankers were rebased to 12 months on October 13, Teekay Tankers had lost 59.18% of its value, while Teekay LNG had dropped just 0.58%.
Rumoured Chinese Order Has Potential To Sink Crude Oil Shipping Sector
While BMI has examined the different modes by which tanker operators can improve their bottom lines. All of these stratagems could be for naught, however, if a rumoured Chinese order for a large number of VLCCs turns out to be true. With China one of the primary markets for VLCCs the result would be a catastrophic drop in rates, and could potentially drive a number of operators out of business over the mid term.
Chinese Whispers Two Chinese oil companies are reportedly preparing to ink orders for 80 very large crude carriers (VLCCs) in an effort to drive down costs and ensure energy security. BMI notes that if these reports prove to be true the effect on the global crude oil shipping sector would be disastrous, driving already depressed rates down still further.
According to unconfirmed reports in the maritime press, a subsidiary of state-owned Chinese oil company Sinopec is said to be looking to sign a contract for the delivery of 30-40 VLCCs between 2013 and 2016. PetroChina , meanwhile, is rumoured to be looking to place a similar order, which could see as many as 80 new VLCCs coming online over the next five years.
Energy Security The motivation for Chinese firms is clear. China is today one of the world's top importers of crude oil, with demand from the Asian dragon having grown hugely in recent years. In 1993 China was importing 69,500 barrels of oil a day (b/d). By 2000 this had risen to 1.55mn b/d, and in 2010 to an estimated 4.83mn b/d. By 2015 we forecast that Chinese oil imports will hit 6.69mn b/d, growth of 38.5% in just five years, and 331.6% greater than in 2000.
The Chinese crude oil shipping fleet has grown over the same period. In 1993 the Chinese tanker fleet, according to UNCTAD data, had a total deadweight tonnage (DWT) of 27.15mn. In 2000 it stood at 33.83mn DWT, and by 2010 had risen to 92.63mn. However, according to London shipbrokers Gibson, the Chinese VLCC fleet is today just 6.7% of the global total, with 39 vessels of 585, and with a current orderbook of 13 vessels.
By developing its own crude-oil shipping fleet to more fully cater for its import needs, China would ensure its energy security. The development of its own fleet can be seen as a counterpoint to China's
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'string of pearls' stratagem of securing Indian Ocean ports for commercial (and potentially naval) use. China is taking over operation of the Pakistani port of Gwadar, which will be a trade hub for Central Asia and a transit point for Chinese oil imports. Most of these are now shipped via the Malacca Strait, making them vulnerable to piracy or naval blockades.
Catering For Domestic Demand China's Crude Oil Fleet And Oil Imports
Sources: UNCTAD, EIA, BMI
Crude Ambition It makes sense for Chinese firms to begin operating their own vessels, cutting out the middle men in transporting the crude from their foreign reserves to their Chinese refineries. Sinopec has been investing in upstream assets to offset the effect of high oil prices on its refineries. PetroChina had few overseas assets before June 2005's US$2.5bn acquisition of half of parent company CNPC's foreign interests. However, PetroChina now boasts holdings in various countries including Kazakhstan, Venezuela and Peru. With increased upstream investments the need for transport for the crude oil will grow; by developing their own fleets the two companies will avoid having to contend with the vagaries of rates in the crude oil shipping sector.
This is a strategy that has already been put into practice by Brazilian mining giant Vale , which has developed massive Chinamax dry-bulk vessels, with the hope that the economies of scale of the huge vessels will help make Brazilian iron ore more competitive in China. Although it appears that the stratagem has been running into trouble, this has been largely through its dealings with China rather than a problem with the idea itself. As Sinopec and PetroChina are both Chinese companies with close links to the state, they are unlikely to face the same difficulties.
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China's Energy Security The Indian Ocean
Source: BMI
BMI notes that the Chinese oil companies will not be the only beneficiaries of the mammoth orders, as the large vessels likely to be developed at Chinese yards, giving the Chinese shipbuilding industry a boost, and potentially enabling it to overtake South Korea as the world's largest once again. According to Asiasis, if placed the orders will be heavily subsidised by the Chinese government to the tune of US$80mn, just 20% less than the estimated breakeven price of manufacturing a VLCC.
Disaster For The Industry Although there is upside for Chinese oil companies, shipyards and energy security from these rumoured orders, BMI notes that the effect on rates for the global tanker industry would be disastrous. According to Lloyds List Intelligence, the global crude oil tanker fleet in September 2011 stood at 1,851, with 39 vessels idling. The current orderbook has 313 vessels due to come online in the years to 2015, 16.9% of the total. If 80 Chinese vessels were added to this it would take the orderbook percentage to 21.1% of the
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total. The fact that they would all be VLCCs, the largest class of tanker currently afloat, makes this even more significant.
If this Chinese order proves to be true BMI believes it could further delay the recovery in the crude oil shipping sector. Returns could drop even further into negative figures as operators' survival tactics fail, leaving many further bankruptcies in the years to come.
Upside Potential For Chinese Shipbuilding Firms China Shipbuilding Industry Company, CNY, Shanghai
Source: Bloomberg
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Industry Trends And Developments

China Promises Port Infrastructure Investment Reflecting BMI's view that improvements are desperately needed in Indonesia's freight transport network, the World Bank has said that Indonesia's logistics export expenses are far higher than those of neighbouring countries, due to the country's low standard of infrastructure. The World Bank's Logistic Performance Index (LPI) ranks Indonesia 75th out of 183 countries. A recent logistics survey conducted by the Bandung Institute of Technology (ITB) showed that Indonesia's logistics costs reach 24% of GDP. Logistics costs from a Cikarang-Bekasi factory to Indonesia's Tanjung Priok Port, for example, can reach US$775, more than a third higher than a comparable distance in Malaysia.
As well as poor road and rail infrastructure, the situation is exacerbated by lack of capacity at the country's ports. World Bank Indonesia official, Henry Sandee, said that ports such as Tanjung Priok can only accommodate ships carrying up to 4,000 containers. While this is adequate for intra-Asia trade, which is traditionally conducted on smaller vessels, it makes exporting to markets further away highly uncompetitive. As a result, much of Indonesia's exports go through Malaysian and Singaporean ports.
BMI believes that if the country can overcome its infrastructure difficulties, with the help of international investment, it has the potential to take advantage of rapidly growing trade volumes. In line with booming exports and imports, our throughput forecasts for the country's ports predict strong growth. Indonesian exports are powering on, despite a host of calamities in the global economy. Through July 2011, Indonesia's monthly year-on-year (y-o-y) export growth averaged an impressive 36.2%, soundly outperforming the region despite malaise in three of its largest export markets. We caution that Indonesia is exposed to the possibility of both a considerable slowdown in China (our core view), and the resulting depressive effect on its ASEAN peers.
However, Jakarta is keen to diversify its trade away from slow-growing developed markets towards faster growing emerging and even frontier markets. One region in focus is Africa, where Indonesia will focus on markets such as South Africa, Nigeria, Angola, Tanzania, and Ghana. Non-oil and gas exports to South Africa alone were up 100.6% in the first seven months of 2011 versus the same period in 2010, and Jakarta views these somewhat insulated markets as a great opportunity against the backdrop of a languishing developed world. In keeping with the trend, Indonesia's imports also surged to a record high in Q211, totalling US$41.7bn. While the increase of US$4.6bn from the previous quarter is considerable, it can be almost entirely attributed to raw materials imports, accounting for US$4.5bn of the total difference. Thus, we continue to expect the boom in raw materials imports to manifest itself in sustained export and manufacturing strength, and see little reason for concern over Indonesia's growing import figures.
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With such strong growth expected, the closing of the infrastructure gaps in Indonesia becomes even more urgent. BMI identifies China as a possible source of funding for Indonesian infrastructure. At a 2010 seminar on the prospects for Indonesia-China relations, Indonesia's Minister for Industry and Trade Coordination Edy Putra Irawady announced that the government had prepared a blueprint for a national logistics system covering the development of ports and shipbuilding businesses. He said that Chinese investment would allow the plan to go ahead, adding that China's technical knowledge in the shipbuilding and port sectors would be an asset to the plan. The chairman of the Indonesian Chamber of Commerce and Industry, Suryo Bambang Sulisto, agreed, saying that China was one of Indonesia's most promising potential partners in the port and shipbuilding sectors: 'What is badly needed by the eastern parts of Indonesia is connectivity. The development of port and shipbuilding businesses will be the starting point for the development of the region.'
BMI notes that China has previously expressed an interest in Indonesian infrastructure. China Investment Corporation (CIC), an investment arm of China's sovereign wealth fund, may invest up to US$25bn in Indonesia's mining and infrastructure industries. BMI believes this investment by China highlights a trend set other countries, whereby China secures access to national resources through investing in a country's infrastructure. CIC has shown interest in investing in three of Indonesia's state-owned firms: electricity utility Perusahaan Listrik Negara (PLN), coal miner Tambang Batubara Bukit Asam and port operator Pelabuhan Indonesia II (Pelindo II). This will enable CIC to create an integrated investment portfolio in the country, centred on coal resources, having a vested interest in both domestic consumption and export capacity.
APM Terminals Making Indonesia Move? In September APM Terminals (APMT) looked likely to expand into Indonesia after the company's parent, AP Moller-Maersk, signed an investment deal with Indonesian port operator Pelindo II. Investment in Indonesia's port sector is sorely needed, so its potential inclusion of APMT is good news. We hope the deal will allow Indonesia's port sector to follow a similar development trajectory to that of Vietnam, whose ports now feature on routes to Europe and the US. Given that AP Moller Maersk boasts the world's largest container line, Maersk Line, and a major port operator, APMT, among its subsidiaries, BMI believes it will seek to establish terminal operations in the country. This would follow the company's strategy in a number of other Asian states.
BMI notes that any investment in Indonesia's port sector would be welcomed. The country's ports score poorly in a peer-to-peer comparison, ranking 11th out of 13 in comparison with other Asian nations and 103rd out of 142 globally. Under-developed ports pose a risk to trade growth, and this is the case with Indonesia. The country has potential to develop not only its trade with other Asian states, but also could play a greater role in trade with US and Europe. Investment is slowly trickling into the country's port sector. The latest development we highlight is that five potential investors have been shortlisted for a project to expand Tanjung Priok.
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BMI's Infrastructure Major Projects Database also highlights the extent of investment in the country's port sector, with 19 projects currently in the pipeline, worth an estimated US$13.3mn. We note that although this investment will certainly aid in the development of Indonesia's maritime sector, the potential inclusion of APMT in the development of a project would be an extra boost to the sector. APMT, like its port operating peers has, via its global portfolio, developed expertise in operating ports, streamlining operations and ensuring that throughput volumes increase. The inclusion of port operators in a country's port sector also normally ensures further investment; in the case of APMT, its connection to Maersk Line tends to see this carrier increase its ports of call to a facility.
BMI notes that the potential expansion of APMT into Indonesia would complement the company's already considerable Asia exposure. It would also fit with its current trend of expanding into ports in emerging markets. In 2010 Asia accounted for the second largest percentage (27%) of throughput (crane lifts split by region weighted by ownership share) in APMT's regional portfolio. Indonesia's role in the global shipping sector is also increasing. According to UnctadStat's Liner Connectivity Index, Indonesia's ports are becoming better connected. BMI believes that Indonesia's ports have a major role to play on the intra-Asia trade routes and depending on their development could follow the Vietnam port expansion trajectory and become stops for the big-money routes to Europe and the US. After all, APMT's development of Vietnam's Cai Mep terminal has led to the facility being added to some of the carrier's Asia-Europe and transpacific services.
Indonesian Coal Exports To Be Constrained? We forecast significant changes to the global coal trade over the coming years as Southern Africa and the US gain a greater share of exports to Asia at the expense of Indonesia and Australia. These changing dynamics will have significant implications for infrastructure and shipping, upon which the growing trade in coal will place significant demands. The pattern of the global coal trade is set to undergo significant changes over the coming years as Southern Africa and the US become major exporters, and the traditional exporters of Australia and Indonesia see output growth constrained by government regulation and taxes. At present, Japan, China and South Korea account for the bulk of coal imports with the five largest importers all in Asia. We expect Asia to remain the dominant consumer of coal and foresee substantial growth in Chinese and Indian demand for coal, in line with continued economic growth in these countries. More specifically, surging domestic electricity demand and continued expansion in steel production will drive demand for thermal and metallurgical coal, respectively.
Traditional Exporters To Decline At present, much of Asia's coal demand is fed by production from Australia and Indonesia, but we expect exports from these countries to be constrained over the coming years. In Australia, the government has proposed a tax on carbon emissions and is also considering a 30% tax on coal and iron ore mining profits. Both of these measures are likely to reduce investment in the coal sector and thus curb the availability of coal for export. In addition, in Indonesia, the government plans to increase domestic consumption of coal
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to boost electricity generation which will also limit exports to Asia. In 2010, Australia and Indonesia accounted for 27% and 23% of global exports respectively, and thus any reduction in exports will have a significant bearing on global coal trade. India could be most affected by a drop off in trade, as it structurally short of coal and reliant on Indonesian exports.
US To Become Major Exporter We expect the US to become a huge coal exporter in the coming years as numerous projects come online and domestic demand dwindles. The US was the sixth largest coal exporter in 2010, with net exports reaching 62mn tonnes, 5.5% of the global total. We see potential for this share to rise significantly over the coming years. With increasing exports to Asia on the cards, we highlight Peabody Energy and PacRim Coal as companies which could benefit from these shifting dynamics as they have the infrastructure in place to benefit from increased exports to China and India. This boom in US exports will have a knock on effect on Colombia, from where the US currently sources 75% of its coal imports. It is therefore likely that Colombian coal production, where we forecast average annual growth of 13.5%, will also be increasingly geared towards Asia, most notably China and India.
Booming Exports From Southern Africa As we have previously highlighted, we forecast a significant increase in coal production in Southern Africa, namely in Botswana, South Africa and Mozambique. As much of this production will not be consumed domestically, we see potential for substantial growth in coal exports from the region, which, along with the US, will eat into the share of global exports currently enjoyed by Australia and Indonesia. Overall, we therefore expect a shift in the source of global exports away from Indonesia and Australia towards Southern Africa and the US. As these regions are further away from the main destination for demand, namely Eastern Asia, this will have significant implications on shipping and transport investment.
Implications For Dry Bulk Shipping BMI believes that changes in coal trade dynamics could potentially lead to high rates as Asian coal importers are forced to seek the commodity from further afield. We fear a decline in output from traditional coal exporters to China and India. We expect South Africa, the US and Mozambique to fill any gaps, with the US power sector moving toward natural gas, freeing up domestically produced coal for export. Additionally, a plethora of projects in South Africa and Mozambique are set to come online in the mid term. This shift in trade dynamics will have a positive effect on the dry bulk shipping sector, as by shipping from the US West Coast and Southern Africa there will be greater tonne mileage. The distance between South Africa's Richard's Bay and China's major coal import port, the Port of Qingdao, is 7,132 nautical miles (nm), as opposed to 4,780nm between Australia's Port of Newcastle and the Port of Qingdao. This will lead to a greater demand for dry bulk vessels as the ships will be in operation for longer.
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This is good news for dry bulk shipping operators, as they have suffered a tough 12 months with overcapacity pushing rates down. In February 2011 the Baltic Dry Index (BDI) reached a yearly low of US$1,043, and although rates of late have ticked up, we are still wary of the overcapacity threat in the market. Longer voyages would enable overcapacity to be ironed out, but BMI notes that rising shipping rates could have another effect. At the moment the relatively low transport rates are benefiting steel manufacturers and energy firms chartering vessels on the spot market. If rates tick up too far, clients will seek a cheaper option; it is in this environment that larger vessels are built.
BMI has witnessed this strategy play out in the transport of iron ore. Brazilian miner Vale is seeking to become more cost-competitive to drive iron ore exports to China. Currently it is at a disadvantage to rival iron ore exporters in Australia due to higher transport costs. As a result, the giant Valemax vessel was born, the idea being that based on economies of scale a fleet of 400,000 deadweight tonne (DWT) giants would decrease transports costs to a level where Brazilian iron ore could compete with Australian iron ore. With this precedent in play, the coal transport sector could see the move to develop larger vessels for the transport of this commodity.
Investors Shortlisted For Tanjung Priok Five potential investors have been short-listed by the Indonesian government for the project to expand Tanjung Priok. The long-delayed expansion project - urgently needed to prevent overloading - was finally believed to be making some real progress. According to Bambang Ervan, a spokesman from the Indonesian Transportation Ministry, the five parties for the US$1.37bn project are: Indonesian stateowned port operator Pelindo II; a consortium between port operators Pelabuhan Socah Madura and Port of Singapore Authority; a consortium formed by Pelindo I, International Container Terminal Services and Rajawali Cemerlang; a consortium consisting of 4848 Global System, Mitsui, Evergreen Group and Nusantara Infrastructure; and a consortium comprising of Huchinson Port Indonesia, Brilliant Permata Negara, Salam Pacific Indonesia Lines and Cosco Pacific.
The project, which according to Ervan would boost the handling capacity of the port by 1.8mn TEUs, was expected to begin construction before the end of 2011 and be completed by 2015. While the details of the project were not explicitly stated, BMI believed that Ervan was referring to the construction of the single container facility at North Kalibaru. The expansion project is aimed at alleviating congestive conditions at the Tanjung Priok and is part of a long-term plan by the Indonesian government to gradually build four new container terminals at the port. The project has been dragging on for many years due to serious regulatory and bureaucratic problems, but the selection of potential investors suggests that the project is finally making some real progress in supporting the overloaded Tanjung Priok. Since the ASEAN-China Free Trade Agreement came into effect in January 2010, Tanjung Priok has been operating at 24 hours a day and suffers from congestion at times of high demand due to its poor infrastructure.
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With total trade in Indonesia expected to grow robustly due to the country's positive macroeconomic conditions and its strategic location at the heart of growing intra-Asia trade, existing facilities at Tanjung Priok are unlikely to cope with the growing volume of trade and will need to be expanded. The expansion projects confirm our bullish forecasts for Indonesia's port infrastructure sector.
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Market Overview Port Of Palembang

The Port of Palembang (POP), also known as Boom Baru Port, is located at a latitude of 2 58' south and a longitude of 104 46' east. POP is an inland port, positioned on the Musi River and located within Palembang City, the capital of South Sumatera (South Sumatra) Province. It is the largest port on Sumatra Island. The principal products handled by the port include crude and non-crude oil, fertilisers, rubber, coal and ammonia. The port is controlled by the state-owned port operator, Indonesia Port Corporation II.
Shipping
The port handled 3,572 ships in 2008. Of these, 2,413 (67.6%) were intra-island carriers (ships on routes within the Indonesian Archipelago) and 1,159 (32.4%) were ships on international routes. The port has a maximum depth of 9m, restricting its capabilities to first and second generation Panamax container ships.
Congestion
Throughput at the port has only increased marginally during the current decade and with some inconsistency year-on-year (y-o-y). Throughput tonnage volume increased 3.4% y-o-y in 2003, fell by 0.1% in 2004, fell by 8.6% in 2005, fell by 15.4% in 2006, increased by 26.2% in 2007, and increased by 2.1% to 10.97mn tonnes in 2008. In 2009, a year of international recession, tonnage slumped by 25.6%. This was followed by a partial 18.8% recovery in 2010 to 9.69mn tonnes.
Container traffic at the port is quite low, compared, for example, with Tanjung Priok, the country's largest port. POP handled 78,346 twenty-foot equivalent units (TEUs) in 2008. Container throughput is increasing, however. The number of TEUs handled each year has risen by 33.7% since 2004. Container throughput increased by 12.4% y-o-y in 2005, 6.6% in 2006 and 18.0% in 2007, and then decreased by 5.5% in 2008. During the global recession in 2009, box volumes fell by 16.1% to 65,752TEUs. A 15.1% gain to 75,653TEUs took place in 2010 and we estimate this recovery continued in 2011, by the lower figure of 5.74%.
There have been no recent reports of congestion at the port, and taking into consideration the recent economic downturn, BMI suggests that it is unlikely to experience congestion-related problems in the short to medium term. Some increase in cargo volumes through the port was felt, however, in the light of the ASEAN-China Free Trade Agreement, which came into effect in January 2010.
Terminals, Storage And Equipment

POP has two terminals: Boom Baru Wharf, which has two terminals accommodating cargo carriers (a container terminal and a general cargo terminal); and Sungai Lais Wharf, which handles sailing vessels.
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Container Terminal The port is equipped with one container terminal berth at Boom Baru Wharf. The facility has one berth, measuring 266m in length, with a depth of 9m. The terminal is capable of handling three tonnes per m2. POP handled 78,346TEUs in 2008 and we estimate this rose to 93,384TEUs in 2010.
General Cargo Terminal The port is equipped with a general cargo berth at Boom Baru Wharf. The facility measures 475m in length and has a maximum depth of 7m.
Storage Boom Baru Wharf has a total storage capacity of 65,058.3m2, 47,100m2 of which is allocated for container storage, 8,173m2 for conventional storage and 9,785.3m2 for warehouse storage.
Equipment Boom Baru Wharf is equipped with facilities for the handling of container cargo, including cranes with a handling capacity of 25-60 tonnes, forklifts with a handling capacity of three to five tonnes, and a flatbed trailer.
Expansions And Developments

There are no reported plans for development of the Port of Palembang.
Multi-Modal Links
POP is located less than 2km from the centre of Palembang City. It is well served by road transport links, being located close to the island's main road network, connecting Palembang with the rest of South Sumatra Province and Sumatra Island. The port is situated approximately 12km from Palembang International Airport.
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Industry Forecast
Port Of Jakarta (Tanjung Priok)
Short Term: Booming Imports And Exports To Boost Volumes Indonesia's economy expanded by 6.5% year-on-year (y-o-y) in Q211, led by a healthy mix of private consumption, net exports and investment. We remain optimistic that the economy can continue to outperform the region, and we see real GDP growth coming in at 5.8% in 2012 (versus consensus expectations of 6.5%). Another global recession would destabilise, but not derail, Indonesia's strong performance.
From an expenditure point of view, private consumption, which makes up 56% of the economy, continues to be the main growth driver, rising by 4.6% y-o-y and contributing 2.6 percentage points (pp) to headline real GDP in Q211. Low levels of consumer debt, strong employment gains, booming terms of trade and a rapidly strengthening currency in real effective terms have helped to underpin consumer spending, which should boost import demand. The consumer story remains alive and well, and we expect growth to rise to 5.0% in 2012. That said, a weakening exchange rate and a deterioration in terms of trade will see private consumption growth underperform overall expansion.
Steady Growth Ahead Port Of Tanjung Priok Throughput, 2008-2016 ('000 tonnes)
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Net exports continue to be a strong growth contributor, adding 2.1pp in Q211 after imports and exports surged by 16.0% and 17.4% respectively. At less than a quarter of GDP, there is significant room for import and export growth to outpace headline expansion, particularly as transport infrastructure is upgraded. However, we believe Indonesia's relative immunity from the global growth cycle, with domestic demand the major growth driver, will offer a measure of insulation from any potential external growth shock. Lower commodity export prices will see Indonesia's trade surplus decline slightly in 2012, from an expected 4.5% to 4.4% of GDP.
In keeping with our macro outlook, we are expecting strong growth at the Port of Tanjung Priok in 2012. We expect total tonnage to increase by 5%, reaching 44.3mn tonnes. In box terms, we expect growth of 9.4%, to reach 5.2mn twenty-foot equivalent units (TEUs).
We caution that there are downside risks to this outlook, however. We are becoming increasingly concerned that a global slowdown could play out over the coming quarters given the ongoing problems facing the developed world and the unsustainable nature of China's growth boom. Should such a scenario play out, we believe that Indonesia would suffer, as was the case in late 2008. However, we do not believe the negative impact on growth would be as harsh as was seen during the global financial crisis and even then, the country managed to post respectable growth of 4%. As we have highlighted a number of times previously, we believe Indonesia's long-held status among investors as a high-risk country is gradually changing, which should shelter the financial markets from the same turbulence as was seen in late 2008.
Medium Term: Upside Potential From New Project Over the medium term our forecasts remain positive. We are expecting strong growth at the Port of Tanjung Priok during our 2012-2016 forecast period. We forecast total tonnage to increase by an annual average of 5.2%, reaching 54.3mn tonnes in 2016. In box terms, we expect average annual growth of 8.9%, to reach 7.2mn TEUs in 2016.
There are downside risks to our outlook, however. With total trade in Indonesia expected to grow robustly due to the country's positive macroeconomic conditions and its strategic location at the heart of growing intra-Asia trade, existing facilities at Tanjung Priok are unlikely to cope with the growing volume of trade and will need to be expanded. World Bank Indonesia official Henry Sandee said that ports such as Tanjung Priok can only accommodate ships carrying up to 4,000 containers. While this is adequate for intra-Asia trade, which is traditionally conducted on smaller vessels, it makes exporting to markets further away highly uncompetitive. As a result, much of Indonesia's exports go through Malaysian and Singaporean ports.
Reflecting BMI's view that improvements are desperately needed in Indonesia's freight transport network, the World Bank has said that Indonesia's logistic export expenses are far higher than those of
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neighbouring countries, due to the country's low standard of infrastructure. The World Bank's Logistics Performance Index (LPI) ranks Indonesia 75th out of 183 countries. A recent logistics survey conducted by the Bandung Institute of Technology (ITB) showed that Indonesia's logistical costs reach 24% of GDP. Logistical costs from a Cikarang-Bekasi factory to Indonesia's Tanjung Priok Port, for example, can reach US$775, more than a third higher than Malaysia.
Boxes Stacking Up Port Of Tanjung Priok Container Throughput, 2008-2009 (TEU)
There are some signs that the port is in line for a much-needed expansion, presenting upside risk to our forecasts. Five potential investors have been short-listed by the Indonesian government for a project to expand the Port of Jakarta, Indonesia's largest seaport. BMI believes that this is positive news for the Jakarta Port (also known as Tanjung Priok), as the long-delayed expansion project - urgently needed to prevent overloading - is finally making some real progress.
According to Bambang Ervan, a spokesman from the Indonesian Transportation Ministry, the five parties for the US$1.37bn project are: Indonesian state-owned port operator Pelabuhan Indonesia II (Pelindo II); a consortium between port operators Pelabuhan Socah Madura and Port of Singapore Authority; a consortium formed by Pelindo I, International Container Terminal Services and Rajawali Cemerlang; a consortium consisting of 4848 Global System, Mitsui, Evergreen Group and Nusantara Infrastructure; and a consortium comprising of Huchinson Port Indonesia, Brilliant Permata Negara, Salam Pacific Indonesia Lines and Cosco Pacific.
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The project, which will boost the handling capacity of the port by 1.8mn containers according to Ervan, is expected to begin construction before the end of 2011 and be completed by 2015.
While the details of the project are not explicitly stated, we believe that Ervan is referring to the construction of the single container facility at North Kalibaru. The expansion project is aimed at alleviating congestive conditions at the Tanjung Priok and is part of a long-term plan by the Indonesian government to gradually construct four new container terminals at the port.
The project has been dragging on for many years due to serious regulatory and bureaucratic problems, but the selection of potential investors suggests that the project is finally making some real progress. Since the ASEAN-China Free Trade Agreement came into effect in January 2010, Tanjung Priok has been operating at 24 hours a day and suffers from congestion at times of high demand due to its poor infrastructure.
With total trade in Indonesia expected to grow robustly due to the country's positive macroeconomic conditions and its strategic location at the heart of growing intra-Asia trade, existing facilities at Tanjung Priok are unlikely to cope with the growing volume of trade and will need to be expanded.
Long Term: Consumer Demand And Strong Commodities Mix To Keep Volumes Up In BMI's view, Indonesia's growth prospects look rosy over the long term, on account of the country's large domestic consumption base and wealth of natural resources. Indeed, we are anticipating real GDP growth to reach an average of 6.5% over the next decade, driven largely by domestic demand, providing plenty of extra import volumes for Tanjung Priok.
BMI believes that if the country can overcome its infrastructure difficulties, with the help of international investment, it has the potential to take advantage of rapidly growing trade volumes.
Port Of Palembang
Short Term: Booming Trade Volumes Boost Port Throughput Indonesia's economy expanded by 6.5% year-on-year (y-o-y) in Q211, led by a healthy mix of private consumption, net exports and investment. We remain optimistic that the economy can continue to outperform the region, and we see real GDP growth coming in at 5.8% in 2012 (versus consensus expectations of 6.5%). Another global recession would destabilise, but not derail, Indonesia's strong performance.
From an expenditure point of view, private consumption, which makes up 56% of the economy, continues to be the main growth driver, rising by 4.6% y-o-y and contributing 2.6 percentage points (pp) to headline real GDP in Q211. Low levels of consumer debt, strong employment gains, booming terms of trade and a
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rapidly strengthening currency in real effective terms have helped to underpin consumer spending, which should boost import demand. The consumer story remains alive and well, and we expect growth to rise to 5.0% in 2012. That said, a weakening exchange rate and a deterioration in terms of trade will see private consumption growth underperform overall expansion.
Net exports continue to be a strong growth contributor, adding 2.1pp in Q211 after imports and exports surged by 16.0% and 17.4% respectively. At less than a quarter of GDP, there is significant room for import and export growth to outpace headline expansion, particularly as transport infrastructure is upgraded. However, we believe Indonesia's relative immunity from the global growth cycle, with domestic demand the major growth driver, will offer a measure of insulation from any potential external growth shock. Lower commodity export prices will see Indonesia's trade surplus decline slightly in 2012, from an expected 4.5% to 4.4% of GDP.
Total Tonnage On The Up Port Of Palembang Throughput, 2008-2016 ('000 tonnes)
In keeping with our macro outlook, we are expecting good growth at the Port of Palembang in 2012. We expect total tonnage to increase by 5.5%, reaching 10.8mn tonnes. In box terms, we expect growth of 5.9%, to reach 84,680 twenty-foot equivalent units (TEUs).
We caution that there are downside risks to this, however. We are becoming increasingly concerned that a global slowdown could play out over the coming quarters given the ongoing problems facing the
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developed world and the unsustainable nature of China's growth boom. Should such a scenario play out, we believe that Indonesia would suffer, as was the case in late 2008. However, we do not believe the negative impact on growth would be as harsh as was seen during the global financial crisis and even then, the country managed to post respectable growth of 4%. As we have highlighted a number of times previously, we believe Indonesia's long-held status among investors as a high-risk country is gradually changing, which should shelter the financial markets from the same turbulence as was seen in late 2008.
Medium Term: Growth Ahead, But Infrastructure Investment Needed Over the medium term our forecasts remain positive. We are expecting strong growth at the port during our 2012-2016 forecast period. We expect total tonnage to increase by an annual average of 5.3%, reaching 13.2mn tonnes in 2016. In box terms, we expect average growth annual of 6.2%, to reach 108,280TEUs in 2016.
We caution, however, that there are downside risks to our outlook, due to lack of capacity at the country's ports. World Bank Indonesia official Henry Sandee said that many of Indonesia's ports can only accommodate ships carrying up to 4,000 containers. While this is adequate for intra-Asia trade, which is traditionally conducted on smaller vessels, it makes exporting to markets further away highly uncompetitive. As a result, much of Indonesia's exports go through Malaysian and Singaporean ports.
Upside Risk Port Of Palembang Container Throughput, 2008-2016 (TEU)
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This means a considerable loss of volumes, as Indonesian exports are powering on, despite a host of calamities in the global economy. Through July 2011, Indonesia's monthly y-o-y export growth averaged an impressive 36.2%, soundly outperforming the region despite malaise in three of its largest export markets. We caution that Indonesia is exposed to the possibility of both a considerable slowdown in China (our core view), and the resulting depressive effect on its ASEAN peers.
Long Term: Plenty Of Potential As Long As Port Infrastructure Is Up To The Task In BMI's view, Indonesia's growth prospects look rosy over the long term, on account of the country's large domestic consumption base and wealth of natural resources. Indeed, we are anticipating real GDP growth to reach an average of 6.5% over the next decade, driven largely by domestic demand, providing plenty of extra import volumes for Tanjung Priok. Nevertheless, unlocking Indonesia's full economic potential will require policy reform success - particularly in the areas of bureaucratic efficiency, corruption and investment promotion - and progress on this front could take place at a slow-to-moderate pace.
Table: Major Port Data Throughput, 2008-2016
2008 Port of Tanjung Priok '000 tonnes -% change y-o-y Container, TEU -% change y-o-y 42,050
2009
2010
2011e
2012f
2013f
2014f
2015f
2016f
40,822
39,997
42,197
44,337
46,638
49,083
51,612
54,343
0.16
3,984,278
-2.92
3,804,305
-2.02
4,610,000
5.50
4,728,516
5.07
5,173,557
5.19
5,646,989
5.24
6,150,135
5.15
6,672,951
5.29
7,227,365
7.98
-4.52
21.18
2.57
9.41
9.15
8.91
8.50
8.31
Port of Palembang '000 tonnes -% change y-o-y Container, TEU -% change y-o-y 10,965 8,160 9,690 10,230 10,796 11,398 12,039 12,705 13,241
2.09 78,346
-25.58 65,752
18.75 75,653
5.57 79,992
5.53 84,680
5.58 89,668
5.62 95,454
5.53 101,949
4.22 108,280
-5.47
-16.07
15.06
5.74
5.86
5.89
6.45
6.80
6.21
Forecasts assume existence of spare capacity and the correspondence of national trade trends at local port level.; e/f = BMI estimate/forecast. Source: Port authorities, BMI
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Trade
Table: Trade Overview, 2008-2016
Real Imports, real growth, % y-o-y Exports, real growth, % y-o-y Total trade, real growth, % y-o-y Nominal Imports, US$bn - % change y-o-y Exports, US$bn - % change y-o-y Total trade, US$bn - % change y-o-y
2008 10.00 9.53 9.77
2009 -14.98 -9.69 -12.33
2010e 17.27 14.93 16.10
2011e 9.00 8.80 8.90
2012f 9.50 8.50 9.00
2013f 9.40 8.20 8.80
2014f 9.20 8.00 8.60
2015f 9.00 7.50 8.25
2016f 9.00 7.20 8.10
146.7 33.62 152.0 19.50 298.7 26.04
115.0 -21.57 130.1 -14.40 245.2 -17.92
162.4 41.18 173.9 33.66 336.3 37.19
192.7 18.64 206.0 18.43 398.7 18.53
210.9 9.45 223.4 8.45 434.3 8.94
266.3 26.26 279.0 24.87 545.2 25.54
313.8 17.84 325.1 16.55 638.9 17.18
369.2 17.67 377.3 16.05 746.5 16.84
431.9 16.98 434.1 15.04 866.0 16.00
e/f = BMI estimate/forecast. Source: National statistics agency, BMI
Table: Key Trade Indicators, 2008-2016 (US$mn and % change y-o-y)
2008
2009e
2010e
2011e
2012f
2013f
2014f
2015f
2016f
Agricultural raw materials Imports -% change Exports -% change 3,928,467 50.19 8,767,816 23.07 3,178,994 -19.08 4,316,550 35.78 5,043,596 16.84 5,480,939 8.67 6,810,613 24.26 7,951,520 16.75 9,282,642 16.74 10,787,644 16.21 29,883,183 16.49
7,078,483 10,448,900 12,902,397 14,195,128 18,318,150 21,766,380 25,653,762 -19.27 47.61 23.48 10.02 29.05 18.82 17.86
Ores and metals Exports 10,842,530 10,229,897 15,426,727 19,041,273 20,850,846 27,186,875 32,320,136 38,116,120 -% change Imports -% change Iron and steel Exports -% 2,200,522 37.65 1,803,547 -18.04 2,670,828 48.09 3,308,717 23.88 3,666,066 10.80 4,807,022 31.12 5,748,932 19.59 6,816,034 18.56 7,976,824 17.03 -10.79 5,256,353 85.36 -5.65 4,313,854 -17.93 50.80 5,725,205 32.72 23.43 6,627,241 15.76 9.50 7,169,847 8.19 30.39 18.88 17.93 44,404,017 16.50 13,753,806 15.71
8,819,557 10,235,064 11,886,570 23.01 16.05 16.14
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Table: Key Trade Indicators, 2008-2016 (US$mn and % change y-o-y)
2008 change Imports -% change 8,911,527 103.08
2009e
2010e
2011e
2012f
2013f
2014f
2015f
2016f
7,303,883 10,816,140 13,399,419 14,846,586 19,467,155 23,281,640 27,603,115 -18.04 48.09 23.88 10.80 31.12 19.59 18.56
32,304,008 17.03
Manufactured goods Exports 52,686,740 48,088,159 58,912,025 66,831,273 71,133,649 84,863,121 96,270,373 109,162,366 123,187,457 -% change 9.26 -8.73 22.51 13.44 6.44 19.30 13.44 13.39 12.85
Imports 79,986,075 69,310,747 85,296,593 95,513,615 101,659,509 120,345,157 136,378,083 155,084,071 176,233,558 -% change Fuels Exports 39,779,570 29,757,828 39,702,817 46,979,039 50,932,070 63,546,735 74,027,741 85,872,930 -% change 36.18 -25.19 33.42 18.33 8.41 24.77 16.49 16.00 98,759,211 15.01 104.25 -13.35 23.06 11.98 6.43 18.38 13.32 13.72 13.64
Imports 30,651,806 24,353,771 38,253,298 47,136,892 52,480,683 68,727,659 82,668,122 98,751,932 117,141,190 -% change 39.36 -20.55 57.07 23.22 11.34 30.96 20.28 19.46 18.62
e/f = BMI estimate/forecast. Source: UNCTAD, BMI
Table: Indonesia's Main Import Partners, 2002-2009 (US$mn)
2002 Singapore Mainland China Japan US Malaysia 4,099.63 2,427.37 4,409.31 2,644.09 1,037.40
2003 4,155.13 2,957.47 4,228.26 2,702.38 1,138.19
2004 6,082.77 4,101.33 6,081.61 3,235.51 1,681.95
2005 9,470.72 5,842.86 6,906.26 3,885.80 2,148.53
2006 10,034.50 6,636.90 5,515.77 4,066.34 3,193.33
2007 9,839.79 8,557.88 6,526.67 4,797.50 6,411.93
2008 21,790.10 15,249.20 15,129.20 7,897.98 8,923.15
2009 15,550.40 14,002.20 9,843.73 7,094.37 5,688.43
Source: IMFs Direction of Trade Statistics
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Table: Indonesia's Main Export Partners, 2002-2009 (US$mn)
2002 Japan Mainland China US Singapore South Korea 12,045.10
2003 13,603.50
2004 15,962.10
2005 18,049.10
2006 21,732.10
2007 23,632.80
2008 27,743.90
2009 18,574.70
2,902.95 7,570.49 5,349.08 4,107.22
3,802.53 7,386.38 5,399.66 4,323.76
4,604.73 8,787.08 6,001.18 4,830.18
6,662.35 9,889.20 7,836.59 7,085.64
8,343.57 11,259.10 8,929.85 7,693.54
9,675.51 11,644.20 10,501.60 7,582.73
11,636.50 13,079.90 12,862.00 9,116.82
11,499.30 10,889.10 10,262.70 8,145.21
Source: IMFs Direction of Trade Statistics
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Company Profiles
Trada Maritime (TRAM)
Strengths The company has dry bulk and tanker operations, providing a diverse range of services. Weaknesses A new contract with Petrobas will offset much of the company's debt. TRAM is seeking to expand its fleet at a time when both dry and liquid bulk sectors are seeing rates drop due to overcapacity. Opportunities The Indonesian government issued a shipping law in 2008 that included a cabotage principle requiring all vessels operating in Indonesian waters to be domestically owned. The regulation came into effect on January 1. Due to the country's ASEAN-5 membership, Indonesian companies are well placed to take advantage of increasing trade volumes in the wake of ASEAN's FTA with China. Threats Rates for shipping both dry bulk and liquid bulk have plummeted due the supply/demand imbalance. Rising fuel prices pose a threat to shipping lines' profit margins.
Overview
Trada Maritime (TRAM) is an Indonesia-based offshore services provider. The company is engaged in the provision of port, marine terminal, logistics and related services to the oil, gas, mining and energy industries. The company is also engaged in the provision of integrated floating storage and offloading (FSO) services, as well as liquid cargo and dry bulk transportation services. The company's direct subsidiaries, which are engaged in shipping and marine transportation, include PT Hanochem Tiaka Samudera, PT Trada Tug and Barge, PT Hanochem Shipping, Hanochem Labuan Samudera, PT Trada Offshore Services, PT Trada Dry Ship and PT Trada Shipping.
Strategy
BMI expects TRAM to take full advantage of Indonesia's new cabotage rules that require all vessels operating in Indonesian waters to be domestically owned. The rule, which came into force on January 1, opened great growth opportunities for domestic shipping companies such as TRAM. Trada's financial director Adrian E Sjamsul said the ruling created a possibility for domestic vessels to ship all export commodities, particularly coal: 'Indonesia exports around 250mn tons of coal every year, and if Indonesian vessels ship at least 25% of the amount, domestic shipping companies will grow better'. Trada is looking to expand its fleet to enable it to cope with the potential increase in volumes. The company is to spend US$120mn to support its business expansion in 2011. BMI notes that TRAM is taking a risk by investing heavily in fleet expansion at a time when overcapacity is driving freight rates down. However, given that Indonesia's new cabotage rules guarantee the company a considerable amount of cargo, it should be protected somewhat from volatile
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spot rates. Sjamsul told reporters at a conference in May 2011 that US$90mn would be raised from loans and the other US$30mn from the company's internal budget: 'TRAM will use the funds to buy six or seven new vessels this year and to support the maintenance and modification of the existing vessels.' He added that the company had already accomplished part of the business expansion. In January for example, the company bought a Panamax-sized vessel worth US$30mn to strengthen its dry bulk fleet and it purchased a 64,239 deadweight tonne (DWT) tanker in April worth US$8mn. The tanker would be converted to an FSO vessel. TRAM has ordered construction of an accommodation barge to serve PT Berau Coal Energy, a coal mining company, and is planning to buy three or four Handymax-sized (typically 52,000-58,000 DWT) to Panamax-sized vessels that would be used as bulk carriers. He added that TRAM, which currently operates 44 vessels including 38 of its own, would also expand its services to the international market in 2011. Financial Results 2011 TRAM reported a 51% revenue increase in the first quarter of 2011, to IDR143.6bn (US$16.8mn), up from IDR95bn a year earlier. Profits rose by 88% to IDR61bn. The company said it was aiming to boost revenue by 80% during 2011 as part of its expansion strategy. 2010 For 2010 Trada reported revenues of IDR405,931mn, up 21% year-on-year (y-o-y). Its net profit was IDR105,925mn, up 6% y-o-y. EBITDA was IDR211,908, up 48% y-o-y. Latest Activity Coal Mine And Dry Bulk Plans Outlined Trada Maritime said it needed IDR2.24trn (US$249mn) to buy a number of new ships for coal freight purposes in September 2011. The ships would be required when its new coal mine begins production in 2012, Trada's finance director, Adrian E. Sjamsul, said. The company plans to acquire a 5,350 hectare coal concession in Mantar, Damai and Kutai Barat, East Kalimantan, with total coal reserves of 61mn tonnes. The ship purchases had yet to be approved by shareholders, Adrian said, adding that the company wanted to buy ships, barges and tugboats. News of the coal mine purchase had boosted Trada's share price to IDR900 from IDR700 a week earlier.
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Samudera Shipping Line

Strengths Weaknesses Opportunities Subsidiary of the larger PT Samudera Indonesia. The company's operations are consolidated in one region. Exposure to the high-growth market of intra-Asia. Potential to increase its role in marine offshore support as Indonesia's cabotage is due to be enacted in May 2011. Threats Growing competition in the intra-Asia market could see the company's market share decrease as major box players get more involved.
Overview
Indonesia's Samudera Shipping Line, which is listed in Singapore, operates in the box, dry bulk and liquid bulk shipping sectors. The company's container operations are mainly exposed to the Asian market, with the line offering services between domestic ports and on intra-Asia routes. The company was founded in 1993.
Strategy
Samudera Shipping Line's container operations have developed to offer both domestic and intra-Asia routes. In Indonesia the carrier pulls into the ports of Jakarta, Bandung, Surabaya, Jambi, Semarang, Palembang, Pekan Baru, Panjung, Batam and Belawan. Samudera Shipping's Intra-Asia coverage has expanded to include the ports of Malaysia, Thailand, Vietnam, Myanmar, Philippines, Hong Kong, China and Taiwan, using the Port of Singapore as a hub port. The carrier offers links to ports in the Indian Ocean, with calls at ports in India, Sri Lanka, Pakistan and Bangladesh. The line has also expanded out of Asia with services calling at the Middle Eastern ports of the UAE, Bahrain, Kuwait, Oman, Saudi Arabia, Qatar, Iran and Yemen. Samudera Shipping's container fleet comprises 31 vessels, with a total of 25,974 twenty-foot equivalent units (TEUs). While the company operates an owned fleet of 16 vessels compared with the 15 that are chartered in, the chartered-in tonnage is made up of larger vessels, with total charter capacity of 16,382TEUs compared with the carrier's owned capacity of 9,592TEUs. The company does not have any vessels on order, but in 2011 expanded its box fleet by buying existing vessels, acquiring 1,054TEUs of vessels for US$13.6mn in January followed by the purchase of another 1,054TEUs for US$11mn in March 2011. Samudera Shipping is also building up its presence in the liquid and dry bulk markets. The company operates nine chemical tankers, two oil tankers and two gas carriers. The company's dry bulk fleet is made up of four coal carriers and two recently delivered Supramax ships. The Sinar Lapuas and Sinar Kutai were both built in South Korea and came online in Q111. The 57,700 deadweight tonne (DWT) Sinar Kutai was due to carry potash from the US to Brazil, while the Sinar Lapuas was to operate on a time charter freighting cargo from China to India. BMI notes that the carrier's marine offshore support fleet provides Samudera Shipping exposure to Indonesia's oil production sector.
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Financial Results
2011 Samudera's Q311 profit fell by 40.5% year-on-year (y-o-y) to US$3.9mn, according to press reports. The company attributed the decline mostly to rising costs, particularly for bunker fuel, charter-hire renewal, stevedoring and port fees. The fall came about despite a 20.3% rise in revenue to US$116.9mn. Containers handled during the third quarter were up by 8.1% to 353,600 TEUs. In a statement, the company said: 'Freight rates for Indonesia domestic shipping services also registered improvements on the back of strengthened demand, while rates for intra-Asia services were slightly lifted by the implementation of surcharges on certain trade lanes.'
Latest Activity
New Container Ship Acquired In August 2011 Samudera said it had purchased a new container ship in Hong Kong, with cargo capacity of 378TEUs. The Sinar Jimbaran, built in 2006, was the second ship acquired during the third quarter to strengthen the company's domestic container shipping division.
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Maersk Line
Strengths As the world's largest container shipping line, Maersk has a greater share of global seaborne container volumes than any other carrier. Its large, expanding fleet offers it the ability to capture trade volumes. Maersk is part of A.P. Mller-Maersk, a diversified company with activities in the oil and gas and terminal-operating sectors that synergise with its shipping operations. Flexibility as a result of fleet size and type. The company was one of the few carriers to post profit in H111. The company has a raft of strategies it can call on during the current depressed environment in the container sector, including laying up vessels and super slowsteaming. Weaknesses The dominance of the Asia-Europe trade route (accounting for 38% of volumes carried) in Maersk's service portfolio leaves the company heavily exposed to a downturn on this route. With such a large fleet, Maersk is constantly running the risk of overcapacity, which could prove a drain on resources if business slows. Its presence in the oil and gas and terminal operating sectors means that Maersk risks an over-reliance on the sector as an integrated whole. This could be dangerous if one sector's activities fail to hedge the other - for example, if oil prices are at odds with bunker prices. Opportunities The company is increasing its exposure to intra-Asia, which is widely considered to offer huge growth potential for the container shipping sector. The company looks set to remain number one in the global container shipping sector and has cemented its position as a global leader with an order for 20 18,000TEU vessels. The line's emerging market routes focus is wise, not only as a diversification strategy from over exposure to the 'big money' routes, but also as a way to get into high growth potential markets early. Threats Container lines have been unable to push rate rises through so far in 2011, leading BMI to fear for their bottom lines. Maersk's offices along with some of its peers were raided in May 2011 by EC officials investigating antitrust claims. If a shipping company is discovered to have acted inappropriately it will be in line for a hefty fine. The company trades in kroner, which means that it is vulnerable to changes in the US dollar. Although the group operates in the oil and gas sector, disparities in the price of oil and bunker costs threaten profits.
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Overview
Maersk Line is the main container shipping unit of the highly diversified shipping and energy conglomerate A.P. Mller-Maersk Group. The other box shipping subsidiaries of the group are MCC, which operates the group's intra-Asia route network, and Safmarine, which transports boxes to and from Africa and the Middle East. The company is based in Denmark but boasts a global presence with 325 offices in 125 countries. The shipping line has 16,900 employees and 7,600 seafarers. Maersk is the largest container shipping company in the world, boasting a fleet with a capacity of 2.48mn 20-foot equivalent units (TEUs) and one of the largest box shipping networks. The company is heavily exposed to Asia-Europe, but is increasing its role in intraAsia trade, where it already possesses expertise in the form of MCC.
Strategy
Maersk continues to dominate the global container shipping sector, holding a 15.8% market share, according to AXS Alphaliner, still some way above its nearest rival Mediterranean Shipping Company (MSC), which boasts a market share of 13%. Routes Maersk's tactics have seen it develop a considerable exposure to the big-money routes with the line operating 10 transpacific services and 10 Asia-Europe services. The line is also heavily committed to intra-Asia, offering 19 routes. Maersk's presence in Asia is mainly through its subsidiary MCC, which operates the group's intra-Asia services. In terms of volumes handled on Maersk's services, Asia-Europe dominates. In 2010 the route accounted for 38% of the total, a slight slip of 2% on the previous year's 40%. Africa is the company's second-largest route, accounting for 15% of the total; Safmarine operates in this area with a focus on the transportation of containers to and from Africa and the Middle East. Transpacific and Latin America both account for 13%, while intra-Asia currently makes up just 6% (in 2010). BMI expects intra-Asia's role in Maersk's service portfolio to increase over the midterm with the company, along with its peers, placing huge emphasis on the growing demand between Asian states. We note that in the space of a year the distribution of volumes across Maersk's route portfolio has seen intra-Asia increase by 1%. While holding its dominant position on the 'big money' trade routes, Maersk is also increasing its exposure to emerging trade routes (ETRs). These include intra-Asia, intraEurope and West Africa. BMI considers this a wise strategy, as competition continues to expand on the Asia-Europe and transpacific routes, pushing rates down. ETRs offer a diversification away from the big money routes and as well as less competition offer high growth potential. There are, of course, obstacles on these ERTs as they link up emerging markets. However, Maersk's tactic of hiving off specific units, as in the case of intra-Asia MCC, is a sound strategy in BMI's view. BMI also highlights the lack of infrastructure at many of the ports on ERTs and notes Maersk's way of getting round this by developing vessels with on-board cranes to negate this risk to their operations. Fleet Maersk boasts the largest fleet in the world in terms of capacity with 2.48mn TEUs, comprising 649 ships. The fleet's dynamics are fairly evenly split between owned and
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chartered with a split of 47% and 53% respectively. The line has over the last quarter increased its use of chartered tonnage to expand its fleet. Not only does the company charter in more capacity than it owns it also charters in more vessels, with the firm's chartered fleet standing at 434 ships compared to its owned fleet of 215 vessels. Maersk appears to be employing a strategy of chartering smaller vessels, while owning and operating larger ones. This could be because of the prestige of owning a large fleet, but BMI believes it is also partly because there is a larger supply globally of smaller vessels, which Maersk can charter in as needed. Maersk's largest percentage of vessels in terms of size is 4,000-5,000TEU ships. Via this strategy BMI notes that the company has flexibility to move ships between routes, with vessels in this size bracket able to be used for both direct services and feeder lines. The company has also invested heavily in larger vessels, with 29.77% of the company's fleet 8,000TEU or over. The company boasts eight of the largest vessels afloat, the 15,000TEU 'E' class. Maersk is implementing a strategy that should in the midterm ensure it remains the market leader in terms of capacity. The company originally ordered 10 18,000TEU vessels. The line has now increased that by another ten. The first 10 vessels will be delivered in 2013 and 2014; the second 10 are scheduled for delivery in 2014 and 2015. The deadline for exercising the last option for an additional 10 vessels is the end of December 2011. At this point Maersk does not intend to exercise the option. However, it reserves the right to hold off on any final decision until the deadline. BMI notes that while volumes on the Asia-Europe route have picked up after the downturn, ordering vessels that can only operate on one route heightens risk. Further highlighting Maersk's strategy of 'bigger is better' are reports that the carrier is seeking to increase the capacity of some of its 8,600TEU fleet to make them 10,000TEU vessels Financial Results H111 Maersk's H111 results were hit, like its peers, by increased bunker prices. Unlike some of its peers, however, the line has managed to remain in the black. The carrier reported a rise in revenue of 5.3% from US$12.575bn in H110 to US$13.244bn in H111, as box volumes handled by the company increased by 6% year-on-year (y-o-y), with the carrier shipping 3.8mn 40-foot equivalent units (FEUs) compared with 3.6mn FEUs in the same period in 2010. The increase was somewhat watered down by the fact that average rates per FEU slipped, decreasing by 3% y-o-y from an average of US$2,986 per FEU to US$2,900 per FEU. The line's H1 profit has decreased y-o-y from US$1.226bn to US$393mn. This decline can be attributed to the increase in the price of bunker fuel, with the average fuel price up 26% yo-y to US$57 per tonne. BMI highlights that there were some bright spots in Maersk's H111 results and that growth in both volume terms and rates has largely been facilitated by the company's exposure to
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ETRs. Volumes on the carrier's African and Latin American routes recorded the highest growth y-oy. African services shipped 13% more containers in H111 than in H110. The company's exposure to Africa also increased, growing to 16% from 15%. The region is now second after Asia-Europe in terms of Maersk's volume distribution. Volumes on the line's Latin America services grew by 12% y-o-y, with the line accounting for 13% of Maersk's volume distribution. BMI highlights that the carrier has been increasing its exposure to both markets over the past 12 months, launching new routes and expanding capacity. Perhaps the most visible sign of Maersk's desire to increase its presence in these two markets is the line's strategy to have ships made up that can cater for them specifically. To increase its coverage of West Africa Maersk has developed a fleet of Wafmax ships. The vessels have been specifically designed to the maximum size that can pull into West African ports; some of the vessels will also boast onboard cranes allowing the ships to pull into West African ports even if they have poor shore-side infrastructure. To cater for the Latin American market Maersk has devised the Santa/Sammax vessel, which has been developed to cater for east coast South America ports, with a capacity of 7,100-7,400 TEUs. Maersk Line is not the only carrier expanding in these regions, with others eager to access their high growth potential. This explains why despite the rise in volumes Maersk's bottom line has not benefited as much as it might as rates have fallen. Rates on Africa and Latin America services decreased by 2% and 4% respectively y-o-y. The routes that managed to avoid declines in rates and in fact improve on levels y-o-y were Maersk's Oceania and intra-Asia services, where rates increased by 12% and 9% respectively. The line, unsurprisingly, has recently announced plans to increase its exposure to both of these routes. As part of the AAUS Group, Maersk, along with APL, Hamburg Sd, Hapag-Lloyd and Hyundai MM, is to offer peak-season coverage with the AAP loop, which will connect Shanghai, Ningbo, Xiamen, Melbourne, Sydney and Brisbane. On the intra-Asia trade route Maersk is increasing its exposure through its intra-Asia subsidiary MCC, which in September is due to start its Shanghai 1 service, linking Shanghai to the Bangladesh port of Chittagong. The growth in rates, although encouraging, has done little to aid Maersk's bottom line, with the Oceania and intra-Asia services accounting for just 5% and 6% of the carrier's total volume distribution. The route that Maersk remains most exposed to is Asia-Europe. The service accounted for 40% of the carrier's total volume distribution in H211, an increase on the 38% for H210. Although box levels carried on the route increased by 9% y-o-y, rates were down 12%, the deepest decline in rate levels for Maersk Line. BMI has previously highlighted that overcapacity on the route has put downward pressure on rates. Despite this tough outlook on the Asia-Europe trade route, Maersk is determined to increase its coverage. The line has been in the vanguard when it comes to mega-vessel expansion, ordering a fleet of 20 18,000TEU vessels, and is reported to be converting 16 of
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its 8,600TEU fleet up to 10,000TEU. Vessels of this size can only be accommodated on the Asia-Europe trade route, which we fear will only exacerbate existing overcapacity on the route. 2010 Maersk's revenue increased by 30.65% y-o-y to US$26bn in 2010, compared with US$19.9bn in 2009. The increase enabled Maersk to return to the black with a full-year profit of US$2.6bn, following a loss of US$2.1bn in 2009. The recovery in revenue was driven by the global uptick in both volumes and demand in the container shipping sector. In terms of total volumes carried, Maersk's box levels shipped increased by 5%. The major driver of Maersk's recovery, however, was the company's ability to increase rates. Year-on-year rates grew by 29%; Asia-Europe saw the greatest rate rise of 52% y-o-y, followed by the transpacific, where rates increased by 33%. The trend BMI notes from Maersk's results is that in all but one case rates increased considerably more than volumes. The exception to the rule was intra-Asia, where volumes on the route grew by 37% while rates rose by 19%. This growth in volumes further cements BMI's view that intra-Asia trade routes hold massive growth potential for the box shipping sector. 2010's results suggest that Maersk may face threats to its bottom-line in 2011. The company achieved its recovery in 2010 mainly through rate rises, but like its peers the line has struggled so far in 2011 to implement planned increases. With growth in volumes shipped yo-y set to remain steady, Maersk's bottom-line could also remain static. We note that it was not simply the uptick in volumes and rates that enabled Maersk to improve its financial position y-o-y. The firm has continued its strategy of slow-steaming, ensuring a saving on bunker fuel. BMI expects this strategy to continue as demand in the market for express services has not yet materialised. Latest Activity Daily Maersk Raises The Reliability Bar Maersk is determined to leave its competitors in its wake, not only in terms of the number of services that it offers, but in its reliability. Delivery reliability continues to gain prominence in the global shipping sector and shippers will no doubt be pleased to hear that Maersk is ingraining it into its operations. The container sector appears to be heading into another downturn and BMI notes that during the previous one in 2009 the reliability of services suffered as slow-steaming was introduced. The Daily Maersk initiative aims to ensure the reliable delivery of goods between four Asian ports (Ningbo, Shanghai, Yantian and Tanjung Pelepas) and three Northern European ports (Felixstowe, Rotterdam and Bremerhaven). To accomplish this Maersk is implementing a cut off that shippers must meet, it will be at the same time every day, to enable the carrier to meet its promise to improve reliability. Shippers will be fined for no-show boxes, but Maersk Line will also face a fine of US$100-300 per container if it fails to meet its delivery requirements. Maersk's strategy could indeed save supply chains time and money and could lead, as
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Maersk no doubt hopes, to shippers wishing for a reliable service to move to Maersk. BMI notes that with the global economy appearing to slow once more, there is currently less emphasis in getting goods quickly and that shippers are instead keen to save money, even if shipments take longer. Tackling Rate Decline With Increases And Super Slow-Steaming As the global box shipping sector heads once more into the doldrums Maersk is busy, like its peers, trying to stem the rate of decline. The company has announced a number of rate increase initiatives, the latest of which include rate increases on the carriers Asia-Australia, Asia-New Zealand and transatlantic services, which are due to come into force in October. BMI notes that lines are struggling to push rates up due to overcapacity in the sector. Maersk is implementing a strategy, first used during the 2009 downturn, of super slowsteaming as a way to save fuel and therefore costs, while at the same time decreasing its overcapacity as slow-steaming requires the use of more vessels. In August 2011 Maersk and CMA CGM announced that they had enacted super-slow steaming on their AE8-FAL 5 service, which the carriers operate together. The service offers a rotation of Ningbo, Shanghai, Shenzhen-Yantian, Tanjung Pelepas, Port Kelang, Le Havre, Rotterdam, Hamburg, Rotterdam, Zeebrugge, Port Kelang and Singapore. The route goes via Suez on the front haul and via the Cape of Good Hope on the back haul. The impact of super-slow steaming will mean 16 days added to the service's sailing time. It now takes 37 days for a ship on the AE8-FAL 5 service to sail on the back haul from Zeebrugge to Port Kelang, while on Maersk's AE1, which is not super-slow steaming, the sailing time is 21 days between Bremerhaven and Singapore. Maersk Investigates Further Expansion Via Vessel Conversions Maersk is already leading the pack when it comes to the 'bigger is better' strategy, with the carrier ordering a fleet of 18,000TEU vessels in South Korea in 2011. Now reports are emerging that it plans to enlarge some of its current fleet via conversion. The line is reportedly preparing to convert some of its fleet of 8,600TEU to 10,000TEU vessels. These vessels, along with the company's planned fleet of 18,000TEU ships, will ply the AsiaEurope route, highlighting Maersk's plan to dominate this trade route. The carrier is reported to have employed China's Qingdao Beihai Shipbuilding Heavy Industry to convert 16 of the line's S Class vessels. The vessels were built between 1997 and 2002 and operate on Maersk's Asia-Europe services. BMI notes that Maersk is not the only one to be investigating vessel conversion as a way to increase capacity. In 2011 reports emerged that CMA CGM was considering a conversion project, increasing three 12,500TEU vessels that the line is due to take on to 16,000TEU. Conversion offers lines a cheaper and quicker way to expand their fleet. Maersk's converted vessels are set to be ready in October 2012. Next Stop Indonesia BMI expects Maersk to expand its Indonesian coverage following the signing of a memorandum of understanding (MoU) between Maersk's parent A.P. Mller-Maersk and Indonesia's port operator Pelindo II. BMI believes that there is a strong possibility that A.P. Mller-Maersk's terminal unit APM terminals (APMT) will seek to invest in the country's port
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sector and that this would likely lead to expansion of Maersk's services to Indonesia as the terminal and container line tend to operate an integrated strategy. This has been the case in Vietnam, where APMT has developed a terminal, the Cai Mep International Terminal (CMIT) and Maersk is set to become a major caller at the facility, with the line's Grete Maersk becoming the first ship to call at the terminal when it opened in August 2011. BMI believes that Maersk's expansion in Vietnam would be a good blue print to follow, as the company moves ahead with its Indonesia strategy. Russia Focus Maersk is not only seeking to expand its Asia coverage, the company is increasing its global exposure, specifically in developing markets. We have in previous quarters highlighted the firm's expansion into Africa and Latin America. Maersk has also been increasing its coverage of Russia. The company has launched a new service (AC-3) to Russia's port of Vostochny on the country's Far East coast. The rotation is Lazaro Cardenas, Balboa, Buenaventura, Lazaro Cardenas, Vostochny, Qingdao, Busan, Kwangyang,Yokohama, Lazaro Cardenas. Maersk has also expanded its coverage of another Russian port launching a service from Ecuador to Russia's Black Sea port of Novorossiysk.
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Mediterranean Shipping Company (MSC)

Strengths MSC is the second largest container shipper in the world. The company has a forward-thinking strategy, with a fleet of 14,000 twenty-foot equivalent unit (TEU) vessels. Weaknesses It is not averse to chartering. This has allowed it to expand its fleet. With such a large fleet, MSC is constantly running the risk of overcapacity, which could be a drain on resources if business slows. With 44 vessels on order, it has the second biggest new-build orderbook globally, at a time when container rates are depressed due to overcapacity. Opportunities The shipping sector has proved lucrative in the past two decades, with trade volumes growing year-on-year (y-o-y) since 1982. Although the downturn affected the company, the medium- to long-term opportunity for trade growth is ever present, and MSC is well positioned to capture these volumes. The company is mitigating risk by reducing its exposure to overcapacity-blighted routes. Threats The line's desire to become number one could be hampered by Maersk Line's plan to order a fleet of 18,000TEU vessels. Rising fuel prices pose a threat to shipping companies' bottom lines. Rates for shipping containers on the traditional routes remain depressed.
Overview
Mediterranean Shipping Company (MSC) was founded in 1970 in Geneva, Switzerland. It launched its first service between the Mediterranean and South and East Africa in the mid1970s. In 2003 it became the second largest container shipper in the world, and remains in that position. The carrier operates 200 direct and combined services weekly, calling at approximately 335 ports. It has 390 offices in 146 countries, and employs more than 30,000 staff.
Strategy
MSC continues to snap at Maersk Line's heels, with a global market share of 13% compared with Maersk Line's 15.8%, according to AXS Alphaliner. BMI believes that MSC will continue to battle for the top position, Indeed, by some measures it has overtaken Maersk Line to claim top position. In February 2011 Containerisation International reported that MSC had overtaken Maersk Line in terms of capacity. This measurement was derived from just taking into account Maersk Line, not the whole Maersk Group, which includes Safmarine and MCC Transport. Taking the group as a whole into account, Maersk Line still has the top position. Routes MSC is heavily exposed to the 'big money' routes, particularly the transpacific, with the line operating five services from Asia to US west coast ports. The line also caters to the US East Coast market, with an all-water service. It operates four Asia-Europe services: two services (Silk Express and the Lion Service) to
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north Europe ports and two routes (Dragon Express and Tiger Service) to ports in the Mediterranean. MSC also caters for the intra-Asia trade, with its New Shogun service linking China and Japan and its TongKing Service connecting China with Vietnam. Some of the line's other services serve a number of countries in Asia before linking elsewhere in the world. The Cheetah Service links Chinese ports with the Taiwanese port of Kaohsiung, before travelling on to Africa. BMI believes that there is room for expansion in MSC's intra-Asia portfolio, with the potential for more intra-Asia specific routes either operated solely or in partnership. In comparison with its peers, MSC has only a small exposure to the intra-Asia market, which is set to be a major growth area for box carriers in the medium term. Fleet MSC has the second largest container fleet in the world, operating 474 vessels with a total capacity of 2mn TEUs. The fleet's dynamics are fairly evenly split between owned and chartered, at 48.9% and 51.1% respectively. MSC appears to be employing a strategy of chartering smaller vessels while owning and operating larger ones. It has an owned fleet of 209 vessels with a capacity of 996,217TEUs, while its chartered fleet of 265 vessels have a combined capacity of 1mn TEU. This could be because of the prestige of owning a large fleet, but BMI believes it is also partly because there is a larger global supply of smaller vessels, which MSC can charter as are needed. An exact breakdown of MSC's fleet is unavailable, but the line is a member of the ultra large container ship club, with a fleet of seven 14,000TEU vessels. MSC is preparing to take on more box ship tonnage, both in the form of ownership and chartered and these vessels are likely to comparatively large in terms of capacity. So far in 2011 it has taken on the second of its fleet of nine 12,500TEU vessels, the MSC Lauren. The line is also due to add to its fleet of 14,000TEU in the medium term, although in an interview with Lloyd's List, MSC's founder and chairman, Gianluigi Aponte, stated that his company had no intention of following Maersk Line's lead and ordering 18,000TEU vessels, with Aponte saying that he was 'only interested in ships up to 14,000TEU'. It should be noted, however, that Aponte was originally not interested in ordering 14,000TEU vessels, yet his company has since done so. BMI will therefore not completely rule out MSC looking to develop vessels larger than 14,000TEU in future. According to AXS Alphaliner MSC's orderbook stands at 44 vessels, with a total capacity of 471,246TEU, or 23.1% of its current fleet, the second largest orderbook in capacity terms in the top 100 container lines. The line is also expected to expand via chartering more tonnage. MSC has backed the order for 10 8,800TEU vessels (six have been ordered with the option for four more) at South Korea's Hyundai Heavy Industries. The order was placed by Germany's Bernard Schulte and Israel's Ofer Brothers and is due online in 2012. The new builds are reported to be set for long-term charters with MSC.
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Financial Results
2011 Not available 2010 MSC does not publish its financial results. However, in 2010 its operating fleet and the amount of cargo carried increased. In that year the line operated 432 vessels, a y-o-y increase of 14.3% from the 387 ships operated in 2009 and above the company's predownturn fleet of 410 vessels. Despite the downturn in 2009, the fleet's capacity continued growing, from 1.4mn TEUs in 2008 to 1.467mn TEUs in 2009 and 1.815mn TEUs in 2010, reflecting the fact that MSC took on larger capacity vessels over this period. However, the real indicator of improvement in MSC's operations is the number of containers carried. This grew by 17.6% y-o-y to reach 12.1mn TEUs in 2010, following a y-o-y decline of 10.5% in 2009. In 2010 levels reached and surpassed the pre-downturn handling level of 11.5mn TEUs, indicating that MSC has recovered from the downturn. Coupled with rate raises in 2010, which were implemented across the board, this meant that the company was in the black in 2010.
Latest Activity
Choosing To Charter MSC appears to be reducing its exposure to the container sector by cutting its owned fleet and using a strategy of charter back. This means MSC still operates the vessels, but does not own them, and is a strategy of risk mitigation, as it can hand back the vessels at the end of the charter if there is no demand, something it would not be able to do if it owned the vessels. MSC has recently implemented this strategy with Norway's SinOceanic Shipping, which has bought a 13,100TEU vessel that currently under construction for MSC at a South Korean shipyard and is due to delivery in 2012. MSC is bareboat-chartering the vessel for 15 years and has the option to buy back the ship after 12 or 15 years. Greece's Costamare has bought MSC's MSC Viviana and MSC Ulsan (6,700TEU and 4,100TEU capacity vessels respectively). The MSC Viviana is to be chartered back to MSC for 10 years and the MSC Ulsan for 63 months. Sharing The Risk Burden MSC's more immediate risk mitigation strategy sees it sharing its exposure by tying up in partnership on some trade routes with Chile's CSAV. The MSC-CSAV partnership operates on three trade routes: Europe-West Coast South America, East Coast South AmericaMediterranean and Middle East and South Africa-India and the Middle East. BMI notes that partnerships between container lines are a common strategy, born out of the 2009 global economic downturn. By linking up, lines are able to share operating costs by sharing vessel capacity. The carriers are therefore able to continue operating at the same level on services. Decreasing Exposure MSC is also mitigating risk by reducing its exposure to trade links that are blighted by overcapacity. MSC, Maersk Line and CMA CGM have pushed back the debut of their
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planned transpacific service, known as the Jaguar service by MSC until 2012. Transhipping In Vogue MSC is set to replace its North Europe-Indian Ocean and Australia direct services via transhipment through the port of Antwerp, Gioia Tauro, Singapore and Balboa. Further Rate Increases On Cards Like its peers, MSC is trying to increase rates. It has engaged in a slew of rate increases, but BMI notes that due to the fact rate levels on the transpacific and Asia-Europe continue to tick lower, lines have had little success in this strategy. The company's next round of rate increases is due to be implemented on MSC's AsiaAustralia services from November 1 2011, with rates to be lifted by US$300 per TEU.
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CMA CGM
Strengths The group has the third-largest container fleet in the world. CMA CGM has acquired a number of diversified subsidiaries, catering for different markets across the globe. Terminal Link supports the growth of the shipping division and the group's subsidiaries. Its multi-modal divisions also bolster growth, providing the customer with an integrated 'door-to-door' service. Weaknesses With such a large fleet, the risk of over-capacity is ever present. The firm is not as diverse as its competitors, such as Maersk, COSCO and China Shipping, which operate services in the bulk and tanker sectors as well. Opportunities The three-pronged acquisition of US Lines, COMANAV and Cheng Lie Navigation offers the opportunity to capture traffic volumes to and from three different regional markets. The partnership with the Yildirim Group will enable the company to return to a strategy of growth rather than being preoccupied with managing its debt. Threats The company's orderbook is a threat during this period of overcapacity in the sector. The company must ensure it does not place the importance of its market share above that of its recovery. The company's rating has been downgraded both by Standard and Poor's and Moodys, and Bloomberg has warned that it fears the carrier may default on its loan obligations. Debt restructuring is leading to less diversity in the company's operations portfolio, with the group selling off stakes in one of its major terminals and its cruise ship company. CMA CGM's offices along with some of its peers were raided by EC officials in May 2011 investigating antitrust claims. If a shipping company is discovered to have acted inappropriately it will be in line for a hefty fine. Overview CMA CGM is the world's third-largest shipping line. Compagnie Gnrale Maritime (CGM) was formed in 1977 with the merger of the Messageries Maritimes (MessMar) and the Compagnie Gnrale Transatlantique (Transat). Compagnie Maritime d'Affrtement (CMA) was founded the following year. In 1996 CMA CGM was privatised and the following year made its first acquisition, Australian National Lines (ANL). This was followed by a spree of acquisitions, beginning with UK-based MacAndrews in 2002. In 2006 CMA CGM purchased Delmas, an African shipping line previously owned by Groupe Bollor. The acquisition propelled CMA CGM to
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third place in the world's container shipping lines and strong growth enabled it to make three purchases in 2007, with the acquisition of Taiwan-based Cheng Lie Navigation Ltd, Moroccan line COMANAV and US-based US Lines. The group has operations in container shipping, with a special focus on reefer cargo and also operates in the tourist industry through its subsidiary Croisires et Tourisme. CMA CGM Logistics operates 14 offices in China, Europe and the Middle East, and the group also owns TCX Multimodal Logistics, a bonded warehouse company that operates in many French ports. CMA CGM's multimodal subsidiaries include French River Shuttle Container; ocean freight forwarder LTI France; and CMA Rail and Progeco, the repair arm of CMA CGM's container business. Terminal Link is the group's terminal operating business. Strategy CMA CGM is the third-largest global container shipping company, holding an 8.6% market share, according to AXS Alphaliner. This puts it considerably behind second placed MSC with its 13% market share, but still a way off fourth-placed COSCON, which boasts a market share of 4.1%. CMA CGM managed to ride out the downturn, despite a period where it looked like the French government might need to get involved to bail it out. The shipping line was determined to remain a family concern, with the company finding an investor in the Turkish Yildirim Group, which agreed to invest US$500mn and take a 20% stake in the shipping line, but left the Saad family in charge with a majority of both shares and voting rights. Debt restructuring is, however, affecting the company's diversity of operations, with the company selling its stake in the Marsaxlokk Malta Freeport terminal and its cruise ship company Compagnie du Ponant. CMA CGM is a major player on the Asia-Europe trade route boasting a service network of 10 routes. The company is exposed to the transpacific with a route network of nine services and is heavily involved in intra-Asia trade. CMA CGM offers more than 20 intra-Asia trade routes. These are, however, feeder services and it is the company's Asian subsidiary CNC Line that operates direct intra-Asia services. BMI expects CMA CGM to continue its strategy of developing its exposure to intra-Asia trade with the region considered to offer major box shipping growth potential. Like its peers CMA CGM's fleet is getting bigger, not only in terms of vessel numbers, growing by 8.9% year-on-year (y-o-y) in 2010, but also in terms of capacity. The company now operates a fleet of 13,000 20-foot equivalent unit (TEU) vessels, with eight vessels boasting more than 11,000TEUs of capacity coming online in 2011 alone. The company has concentrated on developing its fleet via chartering in tonnage. Chartered tonnage accounts for 62.4% of CMA CGM's total TEU capacity. This tactic, BMI notes, offers the company considerable flexibility, as during periods of decline in volumes the company can return chartered vessels to owners when the charter period has finished, thereby decreasing its fleet and therefore its operating costs. Financial Results H111 France's CMA CGM posted an 8% increase in its revenue from US$6.77bn in H110 to
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US$7.3bn in H111. The company's net profit, while remaining in the black, decreased by a massive 72% to US$237mn from US$849mn a year earlier. The company highlights that with increases in its rates on South American and Caribbean lines, up 5% and rate levels up 6% and 11% on transatlantic and transpacific services respectively, the company was able to offset a decline in rates on Asia-Europe and Mediterranean trade routes. The company appears confident that it will be able to post a profit for the whole of 2011 and has highlighted new areas of focus. CMA CGM has announced that plans to expand its coverage of Russia and India, and will continue its Latin America expansion. 2010 CMA CGM's revenue increased by 36% in 2010 to US$14.3bn from US$10.5bn in 2009. The increase enables the line to post a US$1.6bn profit following the company's loss of US$1.4bn in 2009. The recovery in revenue was driven by the global uptick in both volumes and demand in the container shipping sector. In terms of total volumes carried CMA CGM's box levels shipped increased by 14.7%. CMA CGM states that 'Asia-Europe and intra-Asia lines enjoyed record businessAsia-US lines returned to pre-recession levels.' BMI believes that the volume uptick is just part of the story, and we note that volumes were up y-o-y and up on 2008 levels (by 4.4%). BMI believes that rate increases also played a massive role. CMA CGM has not released its y-o-y rate increase growth and so we do not have any figures to back this theory, but CMA CGM's peers such as Maersk Line recorded considerable rate increases in 2010, which enabled them to return to the black, and we believe that this was also the case with CMA CGM. Latest Activity Preparing For Panama Canal Expansion CMA CGM is preparing itself for a role in Latin America and the Caribbean, with the line's decision to invest US$100mn in the port of Kingston in exchange for a 35-year lease of the port's Gordon Cay terminal. CMA CGM plans to use Kingston as its transhipment hub in the region once the expansion of the Panama Canal is completed in 2014. Although BMI maintains its view that Kingston is unlikely to become a hub for transhipment cargo destined for the US, we believe the port is well placed to tranship cargo destined for other Caribbean and Latin American ports. ETR Expansion Mitigates Risk CMA CGM, like many of its peers, has been trying to mitigate its exposure to the loss making Asia-Europe and transpacific routes by expanding into the emerging markets. CMA CGM has done this by introducing new emerging trade routes (ETRs) and expanding its existing ETR coverage. In Africa the French carrier has joined forces with Chile's CSAV to launch the WAX II, which will link Asia and West Africa. The service calls at Ningbo, Shanghai, Chiwan, Hong Kong, Port Kelang, Lagos-Apapa, Lome, Tema, Abidjan, Doula and Ningbo. The service deploys 10 vessels, five from CMA CGM's fleet and five from CSAV. The vessels have capacities of
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2,500-3,100 TEUs. In Latin America the carrier has upgraded its Gulf Bridge Express service adding direct calls to New Orleans and Puerto Cabello in Venezuela. In Asia the company has expanded its coverage of Vietnam with a call at Cai Mep, on the company's Straits-North Vietnam feeder service. In Europe CMA CGM focused in Q311 on Russia, with the country's Far East port of Vostochny being added to one of CMA CGM's intra-Asia rotations. Tackling Rate Decline With Increases And Super Slow-Steaming As the global box shipping sector heads once more into the doldrums, CMA CGM is busy trying to stem the rate decline. The company has announced a number of rate increase initiatives, the latest of which include rate increases on the carriers North Europe-India and Pakistan, Asia-West Mediterranean and the Adriatic and Asia-West Africa services. BMI notes that lines are struggling to push rates up due to overcapacity in the sector. CMA CGM is also implementing a strategy, first used during the 2009 downturn, of super slow-steaming as a way to save fuel and therefore costs, while at the same time decreasing its overcapacity as slow-steaming requires the use of more vessels. In August 2011 CMA CGM and Maersk Line announced that they had enacted super-slow steaming on their AE8FAL 5 service, which the carriers operate together. The service offers a rotation of Ningbo, Shanghai, Shenzhen-Yantian, Tanjung Pelepas, Port Kelang, Le Havre, Rotterdam, Hamburg, Rotterdam, Zeebrugge, Port Kelang and Singapore. The route goes via Suez on the front haul and via the Cape of Good Hope on the back haul. The impact of super-slow steaming will mean 16 days added to the service's sailing time. It now takes 37 days for a ship on the AE8-FAL 5 service to sail on the back haul from Zeebrugge to Port Kelang, while on Maersk Line's AE1, which is not super-slow steaming, the sailing time is 21 days between Bremerhaven and Singapore. Downgraded CMA CGM has been plagued by suggestions concerning its financial position, with Bloomberg reporting that the line had a nine-in 10 chance of defaulting on its loan obligations within five years due to a drop in freight rates and bond prices. CMA CGM refuted Bloomberg's analysis stating that what the news agencies had said was based on a theoretical financial model. The carrier has however had to accept being downgraded by two rating agencies, an issue a number of box lines have had to face in 2011. Standard and Poor's decreased their rating for CMA CGM to B++, while Moodys downgraded the company from B1 to Ba3. BMI notes that CMA CGM had a tough time in 2009 during the downturn, with the company struggling to meet its loan commitments for its newbuild fleet. The company's creditors stepped in at the last minute. CMA CGM Pays For Iran Connections We have previously highlighted that CMA CGM has been caught up in an investigation surrounding Iranian sanctions, with the shipping line accused of being lax in checking for contraband materials linked to Iran. In March 2011 the company was found to be shipping
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weapons destined for the Gaza Strip aboard its vessel the MV Victoria. Republican congressmen Mike Conaway and Peter King have been vociferous in their calls for US sanctions against the company. In response CMA CGM stated that 'as regards trade to and from Iran, CMA CGM diligently applies the rules prescribed by the United Nations, the EU and the US.' Nevertheless, the company has set up a special in-house 'compliance desk' in order to double-check all dealings with the pariah state. The company no doubt hopes that by paying a fine of US$374,400 for violating the embargo action against Iran, Sudan and Cuba, it can put the episode behind it.
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COSCO Container Lines Company Limited (COSCON)

Strengths The carrier has a good relationship with the Bank of China, which has provided the company a source of credit since the 1960s. COSCO's investment in a number of shipyards allows the company flexibility in adapting its order book to the economic climate. Weaknesses Opportunities The company has a well-diversified fleet. For H111 COSCON reported revenue of CNY20.3bn, down 3.4% year-on-year. The opening of direct shipping routes between China and Taiwan is likely to provide long-term growth opportunities for COSCO's container operations. Threats The group is well poised to take advantage of growing intra-Asian trade. Container shipping rates are remaining depressed due to over-capacity. Lines have been unable to push through many rate rises, which were the major factor behind companies' revenue recovery in 2010. Elevated bunker costs will impinge on companies' profit margins. The company has had to introduce a number of Emergency Bunker Adjustments in 2011. Overview COSCO Container Lines Company Limited (COSCON) is one of the world's biggest container shipping lines and is the largest Chinese carrier, outgunning rival line China Shipping Container Lines (CSCL) in terms of fleet capacity. COSCON is the container-transporting arm of China Cosco Holdings Company. The company dates back to 1961 and was originally engaged in transport solutions and did not become a shipping company until 1993. In 2005 the firm issued an initial public offering (IPO) and now trades on the Shanghai and Hong Kong stock exchanges. China COSCO Holdings Company is the flagship and integrated platform of COSCO. The group is owned by the People's Republic of China. Strategy Routes According to COSCON's website the liner operates more than 100 international shipping routes, connecting 140 principal ports in 44 different countries and regions. The company has a further 21 domestic services. As a Chinese company, COSCON is heavily exposed to the intra-Asia market; a region BMI believes is a growth area for shipping, particularly at a time when the more traditional routes are suffering from over capacity. In addition to 11 intra-China dedicated services, the company also has a large number of services connecting Chinese ports with ports in other Asian countries such as Vietnam and Indonesia. The company also has lots of exposure to the traditional East to West big-money routes of Asia-Europe and transpacific. As well as falling rates, the company has also been faced with increasing bunker fuel prices. In an effort to combat this it has introduced a number of bunker adjustment surcharges. Like others, the company has also tried to introduce a peak season surcharge, but with vessel
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supply continuing to outweigh imbalance, this did not hold. Fleet According to AXS Alphaliner data, as of the start of July 2011 COSCON was the fourthlargest container shipping line in the world, with a market share of 4.2%. The company's container fleet has a capacity of 650,840 20-foot equivalent units (TEUs). This is made up of 148 vessels. Of these the majority are Post-Panamax vessels with capacities of more than 4,500TEUs. The largest vessels in the Cosco fleet cover Africa, America, Europe and Asia, all of which have a capacity of 10,062TEUs. Of these 148 vessels COSCON has a fairly balanced ratio of chartered vessels, accounting for 43.5% of the fleet at 302,413TEUs. COSCON's owned fleet of 96 vessels makes up the remaining 348,427TEUs of capacity. COSCON's orderbook shows an ambitious growth strategy. According to Alphaliner, the liner company currently has 32 ships on order, with a total capacity of 244,168TEUs. This is a considerable 37.5% of COSCON's current fleet capacity. Financial Results H111 For H111 COSCON reported revenue of CNY20.3bn, down 3.4% year-on-year (y-o-y). Capacity was 635,000TEUs, up 6.3% y-o-y. The company shipped 3.2mn TEUs, up 9.8% yo-y. Volumes were up on all routes with the exception of the trans-pacific, where they fell 0.1%. Revenues, however, were down on three out of five routes, reflecting BMI's view that over supply, rather than lack of demand, is the reason rates are depressed. Q111 China Cosco Holdings Company has released its results for Q111, with both volumes and revenues up. During the three months to March 31 COSCON transported 1.46mn TEUs, up 12.1% on Q110. Growth was achieved on all of the company's shipping routes. Revenues were up by 4% y-o-y to CNY7.89bn, with an increase achieved on the transpacific route, other international routes and China domestic trade. BMI notes that the rise in volumes is significantly greater than that in revenues, demonstrating the effect that the fall in rates has had. Despite the rise in revenues for the COSCON, the China Cosco Holdings Company as a whole recorded a net loss for the quarter. Its revenues were down by 5.6%, from CNY17.41bn to CNY16.44bn, and the bottom line was a net loss of CNY503mn, as opposed to a profit of CNY883 in Q110. This will have been contributed to by both the disastrous performance of the dry-bulk shipping sector through the quarter, coupled with the elevated cost of bunker fuel on the back of Middle Eastern political unrest. 2010 COSCON's parent company's Q310 results show an improvement on Q309. Its revenues were up by 34.2%, hitting US$3.3bn (CNY21.6bn). Profits were also up massively, by 397.4% to reach US$320.24mn (CNY2.1nn). For the first three quarters of the year profits were up by 205.2%. The company stated in January 2011 that COSCON increased its peak-season route
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coverage in 2010 by 39.8% on its transpacific services and by 42.9% on its Far East-Europe services. COSCON's Managing Director Sun Jiakang said: 'In 2010, with the crisis fading out, the world economy and global trade gradually speeded up the recovery. We arranged and adjusted our deployment according to the regional market demands and the business performance.' Latest Activity Far East-Med Upgrade Hong Kong's OOCL and COSCO are upgrading their Far East-Mediterranean Express (MAX/MEX) service from 5,500TEU to 8,000-8,888TEU ships. OOCL now deploys the 8,888-TEU OOCL Beijing, the 8,888-TEU OOCL Canada and the 8,063-TEU OOCL Europe on this service while Cosco deploys the 8,495-TEU COSCO Korea, the 8,495-TEU COSCO Thailand and the 8,400-TEU COSCO Napoli. The MAX/MEX rotation is Shanghai, Ningbo, Hong Kong, Shenzhen-Shekou, Singapore, Jebel Ali, Dammam, Port Kelang, Singapore, Hong Kong and back to Shanghai. Seaspan Takes Third 13,100-TEU Ship Container ship owner-charterer Seaspan took delivery of the third in a series of eight ships with capacities of 13,100 20-foot-equivalent units for charter to COSCO container lines. The COSCO Development, built by Hyundai Heavy Industries in South Korea, is Seaspan's ninth delivery in 2011 and expands the company's operating fleet to 64 vessels. Seaspan has eight more ships scheduled for delivery through 2014. Seaspan's vessels now average five years in age and have an average remaining charter period of approximately seven years. All of the eight vessels to be delivered to Seaspan are committed to charters of 10 to 12 years. The company's customers include Maersk, China Shipping, CSAV, COSCO, Hanjin, Hapag-Lloyd, "K" Line, MOL and United Arab Shipping.
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Hapag-Lloyd
Strengths It has a large global presence, with offices across the world and shares in two terminals. Weaknesses It is breaking into the Yangtze shipping route sector. Hapag-Lloyd now operates in only one cargo market, the container market. The company had to rely on state aid to see it through the 2009 downturn. Lack of exposure to intra-Asia, which is widely considered to be the major mediumterm growth market for the container shipping sector. Opportunities The company is set to join the mega-vessel club, with four vessels with a capacity of 13,200 20-foot equivalent units (TEUs) each on order. Its association with Grand Alliance carriers enables it to enter into vessel-sharing agreements or jointly-operated services with ease. Threats Uncertain outlook for container shipping sector, with the threat of overcapacity still looming. TUI's planned stake sale in Hapag-Lloyd failed and a planned IPO has been pushed back to 2012-2013 The company posted a loss in Q111 and Q211 leading to BMI fearing further losses in 2011 on the back of rate declines. Hapag-Lloyd's offices along with some of its peers were raided by EC officials investigating antitrust claims in May 2011. If a shipping company is discovered to have acted inappropriately it will be in line for a hefty fine. Overview Standard and Poor's have decreased Hapag-Lloyd's rating from stable to negative Gains in the US dollar against the euro, in which Hapag trades, could erode profits.
Hapag-Lloyd has a 160-year history, dating back to the foundation of German lines Hamburg-Amerikanische-Packetfahrt-Actien-Gesellschaft (Hamburg-America Line, or Hapag) and Norddeutscher Lloyd (NDL) in 1847 and 1857 respectively. The two lines merged in 1970 to form Hapag-Lloyd AG. In 1997 the line became a subsidiary of German tourism giant TUI AG, which purchased 100% of shares in Hapag-Lloyd in 2002. In 2005 Hapag-Lloyd acquired Canadian liner CP Ships. In March 2009 TUI sold Hapag-Lloyd to the Germany-based Albert Ballin Consortium. The consortium has a 56.67% stake in Hapag-Lloyd. It is made up of the City of Hamburg (40.67%), Kuhne Holding AG (26.55%), Signal Iduna (12.61%), HSH Nordbank (8.4%), MM Warburg Bank (8.4%) and HanseMerkur (3.36%). TUI has kept a 43.3% stake in Hapag-Lloyd. TUI has failed in its plan to offload its stake in Hapag-Lloyd in 2011. Buyers that came forward to participate were reported to be an Omani state fund and China's HNA Group. A
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planned initial public offering (IPO) of Hapag-Lloyd has been pushed back to 2012-2013. The company has stakes in two terminals: a 25.1% share in Hamburg's Container Terminal Altenwerder GmbH and a 20% stake in Montreal Gateway Terminals. Strategy Hapag-Lloyd is ranked fifth in AXS Alphaliner's top 100 container line rankings. The company holds a market share of 4% and operates a fleet of 625,300TEU, 24,539TEU off forth placed COSCON and 14,376TEU of sixth ranked Evergreen. The relative closeness in this part of the rankings means that lines rise and fall quite regularly. Routes Hapag-Lloyd has developed considerable exposure to the big money routes. It operates eleven trans-Pacific services and seven Asia-Europe services. It is also highly exposed to the trans-Atlantic route, offering a total of eight services. One area where the company currently has minimal exposure, but that is considered by the industry to have huge growth potential, is intra-Asia. The line is however expanding its presence on this trade route, both alone and in partnership - it operates a service with Thailand's Regional Container Lines (RCL). BMI believes that if Hapag-Lloyd wishes to pursue a strategy of increasing its intra-Asia coverage, then it will likely do so through partnerships with lines based in the region. In terms of volumes handled on Hapag-Lloyd services, the company's transatlantic routes dominate. In 2010 the routes accounted for 23% of the total cargo transported by the company. Asia to Europe is the company's second-largest route exposure, accounting for 22.5% of total volumes shipped. The amount of cargo Hapag-Lloyd ships on the trans-Pacific and Latin America routes are roughly the same, with the routes accounting for 22% and 21.8% of the total respectively. Hapag-Lloyd's exposure to Latin America has increased. In 2009 the route accounted for 19.7% of the line's total volumes transported. Fleet Hapag-Lloyd boasts a fleet capacity of 625,300TEUs, with 144 vessels. Over the last quarter the company has increased its use of chartered vessels, with its chartered fleet increasing to 57.3% of the total. In terms of vessel numbers Hapag-Lloyd operates more chartered tonnage, at 88 vessels, than owned vessels, with a fleet of 56. The firm appears to be employing a strategy of chartering smaller vessels, while owning and operating larger ones. Hapag-Lloyd's largest percent of vessels in terms of size is 4,000-6,000TEU ships. BMI notes that this strategy means the company has flexibility to move ships between routes, with vessels in this size bracket able to be used for both direct services and feeder lines. It operates 18 very large container ships and its current largest vessels offer a capacity of 8,749TEUs. Hapag-Lloyd is set to join the ultra large container ship operating club. It has ordered four 13,200TEU vessels from South Korea's Hyundai Heavy Industries. As well as the four new builds, the US$1.4bn deal also includes the upgrade of six vessels the company already had on order at the yard, which were due to be 8,749TEU vessels, but will now be 13,200TEU ships. The vessels are due to come online between mid-2012 and the end of 2013, and will
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operate alongside the vessels of Hapag-Lloyd's Grand Alliance partners (NYK and OOCL) on Far East-Europe routes. Financial Results Q211 Hapag-Lloyd's revenue fell by 9% in Q2 to US$2.1bn. The company posted a net loss of US$37mn compared to a US$294mn profit in Q210. The decline was blamed primarily on freight rates, which fell from a US$1,563 per TEU average in Q111 to US$1,531 per TEU in Q2. High fuel costs, Japan's decrease in demand following March's earthquake and Tsunami, and the dollar's weakness against the euro were also blamed. Q111 Hapag-Lloyd sailed into the red in Q1 with a loss of EUR22.1mn despite a revenue of EUR1.4bn, a year-on-year (y-o-y) increase of 16.5%. The loss was attributed to high bunker fuel prices and increased competition. Freight rate revenue in fact increased y-o-y by 10%, but BMI fears that with rates on major routes decreasing in the last few months the company's revenue for H1 will be hit by the rate declines 2010 Hapag-Lloyd's revenue increased by 87.9% y-o-y to EUR6.2bn, up from EUR3.3bn in 2009. The increase enabled the firm to return to the black, with a full-year profit of EUR428mn, following a loss of EUR402mn in 2009. The recovery in revenue was driven by the global uptick in both volume and demand in the container shipping sector. In terms of total volumes carried, Hapag-Lloyd's box levels shipped increased by 6.7%. The major driver of this recovery was, however, the company's ability to increase rates. Annually, rates grew by 24.8%; Asia-Europe saw the greatest rate rise of 42.2% y-o-y, followed by Australasia where rates increased by 36.9%. BMI notes from Hapag-Lloyd's results that case rates increased considerably more than volumes. Asia-Europe rates increased by 42.2%, while volumes on the route grew by 6.4% y-o-y. Australasia rates increased by 36.9%, but volumes on this route in fact fell by 18.2% y-o-y. BMI wonders what 2011 holds for Hapag-Lloyd's bottom line. The company achieved its recovery mainly by rate hikes. However, like its peers it has struggled so far in 2011 to implement planned rate increases and, with growth in volumes shipped y-o-y set to remain steady, its bottom line could also remain static. Latest Activity TUI Stake Sale Fails Despite reported interest from Oman's state fund and China's HNA Group (owner of Hainan Airlines) in TUI's stake of Hapag-Lloyd, the 49.8% stake sale failed. The company's IPO has been delayed until 2012-2013 and disagreements between stake holders appear to have risen again, with Karl Gernandt, CEO of Kuehne + Nagel, which holds a stake in Hapag-Lloyd through its membership of the Albert Ballin consortium, stating 'the Kuehne
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Holding was a strong supporter of the idea, but as long as we do not have clarity about the final ownership structure, an IPO is not going to come', as reported by the Financial Times. Raising Rates Like most of its peers Hapag-Lloyd has been trying to tackle the declines in box rates with rate increases, with mixed success. The company has had to delay its planned October 1 2011 rate increase on its Canada-Asia services until November 1 2011, while the company still appears set to implement a rate increase on its transatlantic services. Rating Agencies Get Negative The tough operating environment in the container shipping sector has led some ratings agencies to decrease their outlook for box lines. Standard and Poor's have decreased Hapag-Lloyd's rating from stable to negative stating that 'the outlook revision reflects HapagLloyd's significantly lower profitability in the first half of this year than we previously anticipated.' Expanding Intra-Asia Coverage In comparison with its peers Hapag-Lloyd has minor exposure to the developing trade route of intra-Asia; however, we have noted that the company is keen to expand its coverage. Over the quarter the carrier has launched two Asia-Asia services, the first launched in August connects China and Australia and the second is a feeder service connecting Singapore and Indonesia.
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Evergreen Line
Strengths Evergreen operates one of the most globalised route networks, with strong coverage of major Latin American and Middle Eastern ports in addition to its core Asian, US and European services. The company's route-sharing agreements allow it to reduce capacity while still meeting clients' demands. It is highly exposed to the intra-Asia trade route, which is widely considered a major growth market in the medium term. Weaknesses With a large container fleet and little diversification into other sectors, the risk of overcapacity is ever-present. The company's flagship services are Asia-orientated, so a shift in the dynamics of this region could make Evergreen vulnerable. Opportunities The company was the first box line to return to the yards after the downturn, and in the medium term is planning to order 100 vessels, which will give it one of the youngest and most modern fleets in the container sector. It is well placed to take advantage of the growth in cargo traffic brought about the opening of direct routes between China and Taiwan. The company is expanding its emerging trade route coverage, with new services connecting Asia and Africa. Evergreen is one of the shipping lines likely to benefit from a tax reduction that the Taiwanese government is proposing for Taiwanese-flagged vessels in order to boost the country's merchant maritime fleet. Threats While the company has built up intra-Asian history and expertise, the region's growth potential is luring new players, increasing the competition Evergreen will face in this region. Box lines have so far been unable to raise rates, and we are concerned that this could have a negative impact on carriers' bottom lines. Evergreen's offices, along with those of some of its peers, were raided by EC officials in May 2011 investigating antitrust claims. If a shipping company is discovered to have acted inappropriately it will be in line for a hefty fine. Overview Evergreen Line is the name and global brand under which five shipping companies operate. The brand was established in May 2007 and encompasses Evergreen Marine, which is based in Taiwan; Italia Marittima; Evergreen Marine (Hong Kong); and Evergreen Marine (UK). A fifth carrier, Evergreen Marine (Singapore), signed a joint service agreement in May 2009. Evergreen Line's main routes focus on the delivery of goods from Asia, particularly Taiwan, Hong Kong, China, South Korea and Japan. The carrier operates to and from the US east and west coasts, South America, Europe, the Mediterranean, the Middle East and Africa. It
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also provides a container service between the east coast of South America and the east coast of the US and a service linking Panama with the US west coast. The carrier provides regular feeder services in the Caribbean and around the Indian sub-continent. Evergreen is engaged in the port-operating sector, with terminals including the Taichung Container Terminal and the Kaoshiung Container Terminal in Taiwan; the Colon Container Terminal in Panama; and the Taranto Container Terminal in southern Italy, in which Hutchison Port Holdings also has a stake. Strategy Evergreen Line has been knocked into sixth position and has lost its accolade of being the largest Asian container line to China's COSCON. According to AXS Alphaliner the line has a capacity of 610,924 20-foot equivalent units (TEUs), just 14,376TEUs behind fifth-placed Hapag-Lloyd but some way ahead of APL, which has a capacity of 590,760TEUs. Routes Evergreen Line boasts a strong presence on intra-Asia trade routes and continues to launch new routes. The latest services to be included in Evergreen's intra-Asia portfolio is the KCS Service linking the ports of Kaohsiung and Cebu, and a service with Evergreen is operating with K-Line to link China and India. The high growth potential of intra-Asia routes has seen a number of lines expand into this area. BMI believes, however, that Evergreen Line is positioned better than most, as intra-Asia is its traditional operating area and it has built up expertise and a client base in the region. The company has also developed a role on the 'big money routes', and has nine AsiaEurope services and 11 transpacific services. Fleet Evergreen Line's fleet boasts 167 vessels, with a capacity of 610,924TEUs. It operates slightly more owned vessels than chartered, at a ratio of 54% to 45.9%. It owns 88 vessels, with a total capacity of 330,167TEUs, while it charters 79 vessels, totalling 280,757TEUs. In terms of vessel capacity the fleet is much smaller than its peers' fleets. Vessels range from 1,618TEUs to 7,024TEUs, with the company not operating a very large or ultra large container fleet. This strategy of a large fleet made up of smaller vessels ties it with intra-Asia routes, to which Evergreen Line is highly exposed. Until ports in the intra-Asia region are developed to take larger capacity ships, BMI believes Evergreen's owned tonnage will remain relatively small in capacity. Evergreen Line appears prepared to take its capacity to 8,000TEUs in terms of owned tonnage and 8,800TEUs in chartered tonnage. It has ordered a fleet of 'very large' container vessels. It appears unlikely, however, that the vessels will get much bigger, with the company's chairman and founder, Chang Yung-Fa, reported to be 'a noted sceptic about the industry trend towards far larger ships, believing that the need to fill them would end up driving down earnings'. Although Evergreen Line might be avoiding a strategy of ordering mega vessels, it is set to be a major client at Asian yards. The line was the first box carrier after the downturn to return to the yards. Chang Yung-Fa announced in 2010 that the line plans to orders 100 vessels.
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According to Chang, the fleet expansion will comprise 20 vessels with 7,024TEUs of capacity (S-type), 20 vessels of 5,364TEUs capacity (U-type) and 20 or more vessels that will act as feeders, with 2,000TEUs of capacity. If this strategy is implemented it will help the company move toward Chang's reported aim of 'steering Evergreen into becoming the world's largest container line in his lifetime'. Financial Results H111 Evergreen Marine managed to remain in the black, unlike many of its peers in H111 despite the fact that its profit declined by 61% to TWD1.39bn (US$48mn) from TWD4.03bn in H110. The company's revenue fell from TWD8.6bn to TWD7.59bn, with Evergreen attributing the decline to too much tonnage afloat and weakening in the economic recovery, which suppressed demand. 2010 In 2010 Evergreen Marine Corp registered revenue of US$3.5bn, a y-o-y increase of 39.9%. This enables the company to sail back into the black with an operating profit of US$403.1mn compared to the loss of US$473mn in 2009. Latest Activity Cutting Back On Transpac Evergreen, like a number of its peers, is decreasing its exposure to the transpacific. The company is dividing its west coast of North America-Asia-Med pendulum service (UAM) into two services, a Far East-Mediterranean service (FEM) and a transpacific service (PNW). Currently vessels with a capacity of between 5,300TEUs and 5,600TEUs operate on the service, but Evergreen plans to decrease this to 5,000TEU-capacity ships on the new PNW service. Intra-Asia Expansion While decreasing its exposure to the transpacific, Evergreen is expanding its coverage of intra-Asia trade routes. Over the quarter the company has launched a new intra-Asia feeder service. The KCS Service links Kaohsiung and Cebu and uses one 850TEU vessel. Increasing Its ETR Coverage Evergreen is not only developing its coverage of the intra-Asia emerging trade route (ETR), is also increasing its exposure to other developing routes. The company has joined MOL on its MZX service, which links Asia with South African and Mozambique ports.
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APL
Strengths APL's parent company, NOL, has developed a full-package approach to the container shipping market offering shipment, terminal operations and logistics. The Singaporean government maintains a 67.4% stake (as of November 2006) in the company through its investment company Temasek Holdings, and its interest introduces an element of stability to the company's operations. Weaknesses The carrier is now exposed solely to the box market. The group is primarily Asia and US focused and relies heavily on major trade lanes, with a limited presence in less established markets such as Africa and Latin America. Opportunities APL's participation in The New World Alliance (TNWA), alongside Hyundai Merchant Marine and Mitsui OSK Lines, enables it to enter into vessel-sharing agreements or jointly operated services with ease. The company's intra-Asia focus should serve the line well, with the region widely considered to offer major growth potential for container lines. Threats It is expanding its fleet and is set to join the mega-vessel club in the mid term. Although the carrier has history and expertise on the intra-Asia trade route, more and more lines are increasing their exposure to the region, with APL facing increased competition. Rates on the 'big money' routes have continued to decline since the start of 2011, which will be a worry for all container lines. A weakened US dollar would affect profits, although it could act to stimulate trade volume growth. Overview APL is the container shipping brand of Singapore-based Neptune Orient Lines (NOL). NOL was formed in 1968, but assumed its current form in 1997 when it merged with American President Lines (APL). NOL remains the holding company listed on the Singapore Stock Exchange. The Singapore government maintains a 67.4% stake (as of November 2006) in the company through its investment company Temasek Holdings. NOL began life as Singapore's national shipping carrier, three years after the country became an independent state. The government-owned company at first operated just five vessels, and achieved its first profit by the mid-1970s when its fleet had expanded to 20 vessels. It held a US$105mn initial public offering (IPO) in 1981. The group diversified into tanker operations in the early 1990s under the brands American Eagle Tankers (AET) and Neptune Associated Shipping (NAS). US-based APL dates back to 1848. The company, originally called the Pacific Mail Steamship Company, began to focus on container shipping in the 1950s. Since the merger, NOL has continued to direct its business towards the container market, divesting tanker subsidiaries AET and NAS in 2003. It established APL Logistics in 2001 in
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a bid to strengthen product supply chains and also operates a terminal operating business, APL Terminals. Strategy With COSCON's ascent in the rankings, APL is now the third largest Asian container line, holding a market share of 3.8%. Globally the company is ranked seventh, according to AXS Alphaliner, holding its rank from last quarter. The company is currently between Taiwan's Evergreen Line, which is 20,164 twenty-foot equivalent units (TEUs) ahead of it, and CSCL, which is 84,168TEUs behind it. Routes Unsurprisingly, considering its base of operations in Singapore, APL operates a considerable intra-Asia service portfolio with 29 intra-Asia routes in total. The high growth potential of intra-Asia routes has seen a number of lines expand into this area. BMI believes, however, that APL is one of the best positioned, as it has built up expertise and a client base in the region. APL, also rather unsurprisingly considering its US-orientated history, has a considerable transpacific route network, with a total of 13 services catering for trade to the US. APL is also somewhat exposed to the Asia-Europe trade route, offering nine services. APL's route strategy therefore suggests the company is keen to expose itself to the global market via the 'big money' routes, but at the same time retain its presence in its traditional area of operations, intra-Asia. Its exposure to intra-Asia should work well, with the region set for growth on the back of free trade agreements (FTAs) between China and the ASEAN 5. Intra-Asia also dominates in terms of volumes handled. In 2010 the route accounted for 39.95% of the total. It also appears to offer the most growth potential and could in the future account for even more of APL's overall volumes. Container levels transported on the intraAsia route grew by 26% year-on-year (y-o-y) in 2010. BMI believes APL will face competition in this area, however, with its peers expanding their services in the region. Transpacific and Asia-Europe routes account for APL's second and third largest volumes, representing 32.96% and 16.2% of the total respectively. Fleet APL operates a fleet of 147 vessels, with a total capacity of 590,760 TEUs. APL's fleet is heavily weighted toward chartered vessels, which account for 71.3% of the company's total fleet. This enables APL to return chartered vessels to their owners at the end of their charters if the operating environment is not conducive to profits. Lines with a high ownership ratio would be forced to lose money by laying up vessels if faced with the same situation. APL's fleet is highly diversified, ranging from feeder vessels with a capacity as small as 319TEUs to a fleet of six very large container ships of 8,110TEUs. The company is implementing a strategy of expansion and, with it, an increase in vessel capacity, placing an order for two 8,400TEU vessels in 2010. In 2011 APL announced a strategy to join the mega-vessel club with an order for 10 14,000TEU vessels at South Korean yards. At the same time the liner ordered two 9,200TEU capacity vessels. The 14,000TEU vessels are to be deployed on APL's Asia-
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Europe services, with the 9,200TEU vessels to be deployed on its transpacific routes. Financial Results Q211 NOL has posted a US$57mn loss for Q211. The company said that its operations were pressured by falling freight rates, as the industry as a whole suffers from overcapacity. It warned that revenue has been flat in the face of rising costs, and that full-year losses for 2011 are becoming a real possibility. In July, NOL's average revenue-per-container dropped 17% y-o-y. Average revenue fell from US$3,076 per forty-foot equivalent unit (FEU) to US$2,557 per FEU. Total cargo volumes increased 7% to 235,200FEUs over the same period. Q111 Despite NOL's revenue increasing by 16% from US$2.098bn in Q110 to US$2.443bn in Q111, the company still posted a net loss of US$10mn. It should be noted that the loss was not as severe as the previous year, when the NOL recorded a net loss of US$98mn. Q111's loss was attributed by NOL's President and CEO Ronald Widdows to rising fuel costs. APL accounted for US$2.1bn of NOL's revenue in Q111. Its container liftings increased by 9% y-o-y, with the average rate per FEU also rising y-o-y by 3%. The company's vessel utilisation for the period was 92%. 2010 APL's revenue increased by 47% to US$8.3bn in 2010, with a core EBIT of US$490mn compared with a loss of US$698mn in 2009. The recovery was driven by an uptick in volumes shipped and also by y-o-y rate increases. The volume of containers carried by APL rose by 23.6% y-o-y in 2010, with average revenue per FEU increasing by 22% y-o-y. BMI notes that although many carriers saw their revenues increase mainly on the back of rate increases, APL's recovery appears to have been driven just as much by volume increases as by rate rises. We believe that this was due in part to the y-o-y growth of volumes on APL's intra-Asia routes, which increased by 26%, and Asia-Europe routes, which grew by 28.6%. Latest Activity APL Advises Shippers To Steer Clear Of Congestion-Hit Chennai In August 2011 Chennai became the second major Indian port to be hit by congestion in recent months, following the Jawaharlal Nehru Port (JNPT)'s troubles, which started in midJune. BMI notes that the problem is a growing one, and highlights the need for many Indian facilities to invest and expand to deal with increased custom. The congestion is said to have been caused by strike action by container truck drivers protesting against increased vehicle turnaround times. This led the port authority to restrict export carting times from four days to three. A number of carriers, including Hapag-Lloyd, have imposed congestion surcharges on shippers, ranging from US$50 to US$65 per TEU. APL India, a local subsidiary of APL, issued a statement regarding the delays at the facility: 'The congestion at Chennai Port is getting worse and as a fall-out, inland container movements are severely affected. Export boxes of some carriers that arrived at the dockside
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rail terminal yard in early July have not been shipped out as equipment operators are unable to retrieve those boxes. While we are working closely with all stakeholders to address trade concerns, we have come to a stage to admit that the situation is now totally out of our control and time guarantees cannot be met.' The congestion has become so bad that APL India has advised shippers to use other ports such as Tuticorin and Cochin wherever possible, providing upside risk to our forecasts for these facilities. Congestion issues at Indian ports have been a mounting concern as the facilities have become a victim of the country's economic success. The overburdened ports have had to cater not only for massive growth in goods exports (BMI estimates that exports rose 37.4% in 2010 in US$ terms) but also imports for the country's burgeoning middle class - consumer spending per capita was US$326 in 2000, while in 2010 we estimate that it hit US$845. APL Seeks To Go Deeper Into China As APMT Bails APL is seeking other Chinese port investments to complement its acquisition of a terminal at the port of Qingdao earlier in 2011. While APL is keen to increase its exposure, APM Terminals (APMT), the sister company of container carrier Maersk Line, is divesting some of its China assets. APL is reported to be seeking investment opportunities in the central region around the Yantgzte River Delta area, an area BMI has previously highlighted as offering considerable growth potential, as it offers a gateway for goods from China's internal manufacturing regions. The line's expansion plans come just three months after the Singaporean firm made its first investment in China's port sector. In May 2011 the container line partnered with China's SITC International Holding Company and Qingdao Qianwan United Container Terminal Company to operate a two-berth container terminal, which is due to open in H211, at the Chinese Port of Qingdao. The Port of Qingdao operations will give the line access to the container shipping sector in northern China's Yellow Sea. The container line, wisely in our view, wishes to have a diversified spread of operations, and is therefore looking to the central band of ports on China's coastline. The huge throughput potential in China's port sector, along with APL's Asia focus, has no doubt led the company to seek to invest in China's port sector. BMI highlights a strong growth outlook for container shipment at China's ports. Our box throughput forecasts for a selection of seven ports (Dalian, Tianjin, Yantai, Qingdao, Shanghai, Ningbo-Zhoushan and Shenzhen) highlight the growth potential, with the total container throughput of these ports set to increase by 14% over the mid term. NOL's Asia focus, with the company operating on the 'big money' routes linking Asia to the US and Europe and also more recently its expanding intra-Asia coverage, also highlights why exposure to the Chinese port sector is a good idea. We believe that the rationale behind APL's expanding port operations is to ensure future access to high-demand Chinese ports. The company can thus be assured access to some of the world's busiest ports. The new
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terminal at Qingdao, for example, will primarily service APL and SITC vessels. BMI notes that while APL is keen to increase its exposure to the Chinese port sector, another port operator that is affiliated with a container line, APMT, is decreasing its exposure. We reported earlier in August that the operator is set to sell its 50% stake in the Xiamen Songyu Container Terminal, at the Chinese port of Xiamen. Over the past 12 months the company has divested other Chinese assets, selling its stake in the Yantian container terminal and not renewing its lease on the container terminal at the Taiwanese port of Kaohsiung. BMI believes that APMT's strategy is a consequence of its overexposure to the Chinese port sector, with the firm operating at box terminals at six ports (including Xiamen). BMI believes that overexposure to one country's port sector is never a good idea, even if growth potential is stellar. APL does not suffer from this problem as it so far has only one Chinese port operation. The company does, however, have considerable experience in the port sector, operating terminals at the port of Kaohsiung in Taiwan, Kobe and Yokohama in Japan, and at the US ports of Los Angeles, Oakland, Seattle and Dutch Harbour. APL Hikes Far East-India Rates APL decided in September to raise cargo rates on routes between the Far East and India to be US$100 per TEU. The increase took effect on September 15 2011 and does not apply to containers travelling from Japan. APL To Leave NYCT APL confirmed at the end of August that it is leaving the New York Container Terminal (NYCT), creating much speculation in the industry that the company is now planning to relocate to New Jersey's Maher Terminals. According to NYCT's chief executive Jim Devine, APL is not renewing its contract with the facility because it is seeking a larger site to accommodate its biggest ships. However, newly proposed bridge tolls by New York state administrators are also thought to be discouraging many freight carriers and were met with widespread disdain when first mooted. APL Offers New Latin American Service APL has decided to offer a new service linking El Salvador and Costa Rica to its Mexican and Panamanian hub. The West Coast Express (WCX) replaces the Panama Andean Express 2 and will take the form of a vessel-sharing deal with Germany's Hamburg Sd, in which APL will operate two 1,300TEU vessels and Hamburg one. APL Logistics Starts Operating Kodak's Cold Room Facility APL Logistics has begun operating Japanese imaging company Kodak's cold room facility located in Mumbai, India. APL engineering experts have converted the facility after the company won the contract to design, build and operate Kodak's new distribution centre. The new 38,000-square feet facility, a technically equipped storage area with advanced cooling technologies and thermodynamics principles, offers storage services for temperaturesensitive products. The area includes three different cold rooms of varying temperatures ambient, 13 degrees and 21 degrees Celsius - to store digital cameras, photographic papers, motion picture films, digital printing plates and plate setting equipment, as well as chemicals.
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China Shipping Container Line (CSCL)

Strengths The company has been one of the fastest growing international liners of the past decade. CSCL has multimodal operations, with a container freight rail segment to capture goods from ocean to land transport. The company has a large presence in China's domestic coastal shipping market, and is active at more than 30 ports in northern and southern China. Owned by the Chinese government, CSCL benefits from a strong relationship with the country's state-owned major banks. Weaknesses The large majority of China Shipping's routes are to and from China, which means the company's growth is dependent on the growth of the wider economy, and in particular, the strength of China's export sector. Whereas other major liners offer diversified businesses, CSCL operates in only one cargo market: the container market. Opportunities The company has reported a loss for the first six months of 2011. The opening of direct shipping routes between China and Taiwan is driving longterm growth in CSCL's intra-Asia trade revenues, with several new ports added to the original quota of ports authorised to offer cross-channel links. The company aims to expand its operations on the Yangtze River. The river carries about one-third of China's coastal and inland trade, which makes it a good source of potential growth for shipping companies. The company is keen to expand its fleet capacity, taking on board a number of 14,000 twenty-foot equivalent unit (TEU) vessels in 2011. Threats The line faces growing competition in the intra-Asia market, with a number of rivals entering or expanding their exposure to what is considered to be the major medium term box shipping growth market. Rates on the Asia-Europe route continue to spiral downwards in the face of evergrowing overcapacity. Overview China Shipping Container Line (CSCL) was established in 1997, and is part of the China Shipping (Group) Company (CSG). The company is controlled by the Chinese government. China Shipping became a company with limited liability in 1997, and in June 2004 it listed 2.4bn overseas public shares on the Hong Kong Stock Exchange. In late 2007, it issued 2.3bn domestic public shares on the Shanghai Stock Exchange. The company is registered in Shanghai and is involved in owning, chartering and operating container vessels. It has several subsidiaries, including container storage and transport firms Yangpu Cold Storage, of which it acquired 60% in 2008, and Yangshan International, in
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which it acquired a 25% stake also in 2008. CSCL operates domestic coastal routes and international container line services from China to Japan, South Korea, Southeast Asia, Europe, the Mediterranean, the US, West Africa and the Persian Gulf. The carrier is a dominant player in the Chinese freight market. The company also operates multimodal transport, including a container railway line, China Shipping No. 1, which transports ocean-going goods by land to key Chinese markets. It is also a majority shareholder in a number of domestic container terminals. Strategy CSCL continues to hold its position in the top 10 global container shipping companies with a market share of 3.2%, according to AXS Alphaliner, unchanged from Q311. However, it has overtaken Hanjin Shipping since our last report to settle into eighth place. The line is unlikely to exceed this position in the coming quarter, as it is 84,168 TEUs behind its nearest rival, APL. It is possible that Hanjin may retake CSCL, however, as it is only 19,764 TEUs short of CSCL's current capacity. Routes CSCL has developed a portfolio of services on the 'big money' routes, operating seven AsiaUS services - three transpacific services and four to US East Coast ports - nine connecting Asia with Europe, and transatlantic routes. The line, while not publishing its exact intra-Asia route network, is exposed to the trade lane, offering a China-Philippines service from March 2011. BMI expects the line to increase its exposure to intra-Asia over the medium term, with the route considered by the industry to offer high growth potential. The company also has a lesser number of services on more emerging trade routes, with services connecting Asia with Africa, South America and Australia. Another potentially high-growth service area CSCL is involved in, but does not have the same levels of competition with the major global players, is Chinese domestic maritime trade. CSCL sub-division China Shipping Domestic Containers Transportation Division is China's main domestic shipping player. Its fleet has a capacity of more than 500,000TEUs. The division closely cooperates with road and railway to ensure complete coverage. It offers four domestic main route services, six domestic sub-route services and coverage of the Yangtze River. The Yangtze River is, in our view, a major shipping growth area, as China's factories move further inland and require longer supply chains. Fleet CSCL has the 8th largest fleet in terms of capacity, according to AXS Alphaliner, with 506,592TEUs of capacity and 144 vessels. The fleet's dynamics are heavily weighted to ownership, a strategy it shares with fellow Chinese shipping line COSCON, suggesting that China's strategy in wishing to increase its merchant maritime fleet (a trend we have seen in the liquid bulk sector) has trickled down to the box shipping sector. CSCL's ratio of owned to chartered vessels stands at 62.4% owned and 37.6% chartered, and it operates the highest percentage of owned vessels of the top 10 global shipping companies. CSCL's owned fleet comprises 76 vessels, with a total capacity of 315,864TEUs, while its chartered fleet stands
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at 68 vessels, with a capacity of 190,728TEUs. In terms of capacity, CSCL's fleet is dominated by tonnage with a capacity of 3,0005,000TEUs. It operates 35 vessels with this capacity and is continuing to expand its fleet with larger capacity vessels. CSCL currently operates 10 vessels with capacities of between 8,000 and 9,000TEUs and eight vessels with capacities of between 9,000and 10,000TEUs. At the beginning of 2011 the line joined the ultra large vessel club, taking on board the 14,074TEU CSCL Star, which operates on the Asia-Europe trade route. There are now four vessels of this size in CSCL's fleet. CSCL appears keen to continue increasing its fleet of larger vessels, indicating that the line wishes to maintain if not increase its presence on the Asia-Europe trade route. Seaspan Corp was reported in February 2011 to be looking to order 10 vessels of 10,000TEUs from South Korean or Chinese yards, with the plan of chartering them to CSCL and Germany's Hapag-Lloyd. The vessels are due to be delivered in 2013-2014. CSCL is also keen to expand its owned fleet. According to AXS Alphaliner, CSCL's order book currently stands at 12 vessels with an overall capacity of 93,896TEUs, equating to 18.5% of the current fleet. Financial Results 2011 CSCL released its interim results for H111 on September 28. The company took revenues of CNY13.97bn, a fall of 12.9% from the CNY16.03bn reported in the H110. The loss for the period attributable to equity holders was CNY630mn, a sharp fall from the CNY1.17bn profit recorded in the same period in 2010. Container shipping companies are struggling to turn profits in the face of declining rates and escalating bunker costs. 2010 CSCL, like many container shipping lines, saw a huge reversal of fortunes in 2010, as the world emerged from the global economic crisis. Its revenues rose by 76.3%, from CNY19.74bn in 2009 to CNY34.81bn, with profits increasing from a loss of CNY6.45bn in 2009 to a profit of CNY4.21bn in 2010. In terms of volumes carried, CSCL handled 6.9% more boxes in 2010 than in 2009, up from 6.74mn to 7.21mn. The greatest gainer was the Pacific trade lane, which grew 19%. Latest Activity Shippers Combine For Africa Service It was reported in July 2011 that CSCL, along with three other major carriers have joined forces to operate a weekly service between the Far East and Africa. The companies involved in the vessel sharing agreement with CSCL are German company Hapag-Lloyd and Japanese firms K-Line and NYK Line. Eleven vessels with a 2,500TEU capacity will be deployed on the 77-day round trip from Shanghai to South and West Africa. New Vessel To Operate On Flooded Asia-Europe Route CSCL took delivery of another mega-vessel during the quarter which it is to add to its AsiaEurope route (AEX-7). The addition of the 14,074TEU CSCL Mercury will, in BMI's opinion, only drive down already depressed rates still further.
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Hanjin Shipping (Container Operations)

Strengths The company is part of the world's biggest shipping alliance, the CKYH Alliance, which it formed with COSCO, K Line and Yang Ming. Cooperation on key long-haul trade lanes minimises costs and means rapid adjustments may be made in the case of market volatility. The line has considerable exposure to intra-Asia and continues to increase its services in the region. The line was one of the first to offer Vietnam as a port of call on an Asia-Europe service. Hanjin Shipping's Vietnam-focused strategy is also evident in its operation of the Cai Mep container terminal. Weaknesses Despite a diversified route portfolio, the company is heavily exposed to the transpacific trade route. The route accounted for 47.98% of box volumes shipped in 2010, leaving the company at risk if volumes on the route decline. Hanjin Shipping has a large order book relative to many of its major competitors (the fifth largest in the top 10 global shipping companies), with an additional 246,417 twenty-foot equivalent units (TEUs) of capacity awaiting delivery. Opportunities The company made a loss of US$254mn in Q211. Recent expansion into more niche, potentially high-growth regions - notably Vietnam and Latin America - may prove lucrative. Threats Container lines have been unable to push through rate rises, which were the major reason behind the revenue recovery in 2010. Overview Hanjin was formed in 1977 and in 1988 merged with Korea Shipping Corporation, becoming Hanjin Shipping Company. Until 2009 the company was part of the Hanjin Group, and has several subsidiaries, including Keoyang Shipping. Hanjin's previous German subsidiary, Senator Lines, discontinued its services in February 2009 as a result of deteriorating market conditions. In September 2009 Hanjin Shipping Company split into two separate companies: Hanjin Shipping, which retained control of the group's core shipping businesses and terminal operations, and Hanjin Shipping Holdings, which manages the subsidiary operations including logistics and ship management. The company is South Korea's largest shipping line, and is also diversified into the dry bulk and liquid bulk shipping markets. It also has a terminal unit, Hanjin Pacific, which complements the carrier's box operations and boasts 12 dedicated terminals. These include facilities at Long Beach, Tokyo, Kaohsiung, Busan and Cai Mep. The division is planning to open a new facility in Jacksonville. The company has three regional headquarters, 200 offices and 30 local corporations. In 2001 the CKYH Alliance was formed, with Hanjin joining COSCO, K-Line and Yang Ming to share capacity on key trade lanes. The alliance enables Hanjin to offer a broader
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coverage and express services. It also plans to jointly develop new terminals. Strategy Hanjin Shipping has maintained its position of ninth within the top 10 global box shipping operators, with a market share of 3.1%, according to AXS Alphaliner. It is 19,764TEUs behind eighth-placed CSCL and 59,545 TEUs ahead of CSAV. Routes Hanjin Shipping operates a highly diversified route portfolio operating on both the 'big money' markets of transpacific and Asia-Europe and the potential high-growth route of intraAsia. The line is most heavily exposed to the transpacific, with the carrier operating 21 services on this route. On the Asia-Europe trade route, Hanjin Shipping operates 13 services and a further 13 on the intra-Asia route. In terms of volumes handled the transpacific dominates Hanjin Shipping's services, accounting for 47.98% of the total box volumes in 2010 with 1.78mn TEUs handled. AsiaEurope accounted for 32.4% of the total shipped in 2010, with 1.2mn TEUs carried on the route that year. Intra-Asia services carried a total of 579,123TEUs in 2010, accounting for 15.6% of the total volumes handled worldwide. BMI believes that, owing to the company's base in South Korea, it is well placed to expand its coverage of intra-Asia, which is widely considered to be the medium-term growth driver for the container shipping sector. BMI notes that in the space of just a year intra-Asia is playing a greater role in Hanjin Shipping's box operations. In 2009 volumes carried on the company's intra-Asia services accounted for 13.75% of the total; in 2010 this had increased to 15.6%. Fleet Hanjin Shipping has a fleet of 102 ships with a total capacity of 486,828TEUs, according to AXS Alphaliner. The line is continuing to rely on chartered tonnage, which accounts for 54.6% of its total operating fleet. Hanjin's number of owned vessels stands at 37. This enables Hanjin Shipping to downsize in the event downturn, with the line able to return chartered vessels to their owners when their charters expire. Lines with a high ownership ratio would be forced to lose money by laying up vessels in this situation. Until now the vessels owned by Hanjin Shipping have been smaller in size than some of the ships it has chartered. The owned fleet is heavily weighted toward vessels of 4,000-5,000 TEUs - with the line owning 16 of these vessels - the smallest of which is 4,024 TEUs. Hanjin owns seven vessels with a capacity of between 5,000TEUs and 6,000TEUs, and a fleet of eight 6,655TEU ships. There are 11 vessels in Hanjin's fleet with a capacity of between 8,586 TEUs and 9,954 TEUs. These are currently the largest owned by the company. In June 2011 Hanjin announced the purchase of five mega-vessels of 13,000 TEU capacity for US$846mn. The order was originally placed by a company that intended to charter the vessels to Hanjin, but the liner will now take direct ownership of the vessels itself. The first ship is scheduled for delivery in Q112. Financial Results Q211 Hanjin Shipping made a loss of US$254mn in Q211, compared to a profit of US$191.04mn in the corresponding period in 2010. Sales were down by 1.5%, from US$2.25bn to US$2.22. The company stated: 'increases in fuel costs and low rates on the main US and
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Europe routes dealt a major blow to the quarterly bottom line.' Its container division drove this, recording a US$157mn loss as opposed to a US$136mn profit in Q210. Average revenue per TEU fell by 15.7%, attributed by Hanjin to a 30.8% fall in Asia-Europe rates, demonstrating how important the 'big-money' routes are to the company. Q111 In the first quarter of 2011 Hanjin recorded an operating loss of US$11mn. The company attributed the loss to the rise in fuel costs through the quarter on the back of Middle Eastern unrest, in addition to the downturn in Asia-Europe rates caused by overcapacity in the fleet. The container division made a net loss of US$28mn, although the overall result was mitigated by the success of the bulk division in turning a profit. The loss in the container division came despite a rise in transport volume (including growth of 22.7% growth in the westbound transpacific trade, 23.3% in Asia-Europe and 39.1% in intra-Asia), underlining BMI's view that intra-Asia shipping will be the primary growth driver in these straitened times. 2010 Revenue at Hanjin Shipping's container operations increased by 52.4% y-o-y to US$6.75bn in 2010, compared with US$4.4bn in 2009. The increase enabled Hanjin Shipping to return to the black, with a full-year operating profit of US$532mn. This came after the shipping line's container operations posted a loss of US$652mn in 2009. The recovery in revenue was driven by the global uptick in both volumes and demand in the container shipping sector. In terms of total volumes carried, Hanjin Shipping's box levels increased by 15%. A major driver of this increase was intra-Asia, where volumes increased by 30.7% y-o-y. Volumes on the line's transpacific services were also a factor, with a y-o-y increase of 17.55%. The major driver of Hanjin Shipping's recovery, however, was the company's ability to increase rates. The rate increases on the intra-Asia route were the major driver in the recovery, increasing by 88.45% y-o-y. Rates grew by 69.9% y-o-y, with Asia-Europe seeing the greatest increase of 52% y-o-y. It was followed by the transpacific, where revenue increased by 33%. Revenue from the carrier's Asia-Europe services and transpacific lines increased y-o-y by 84.5% and 61.3% respectively. In BMI's opinion, a threat is presented by what 2011 holds for Hanjin's Shipping bottom line. The company achieved its recovery mainly by raising rates and, like its peers, it has struggled so far in 2011 to implement its planned rate increases. With y-o-y growth in volumes shipped set to remain steady, Hanjin Shipping's bottom line could also remain static. However, it was not simply the uptick in volumes and rates that enabled Hanjin Shipping to improve its financial position. It has continued its strategy of slow-steaming, ensuring a saving on bunker fuel costs. BMI expects this strategy to continue as demand for express services has not yet materialised. Latest Activity Shipping Companies Challenge New Cargo Handling Fee Nine shipping companies including China Shipping, Evergreen, and Hanjin complained in
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August against the implementation of a new cargo fee scheme by the Port Authority of New York/New Jersey (NY/NJ) in the US. Under the new scheme, all carriers are required to pay a cargo handling fee of US$4.95 per TEU, which would help the port authority to upgrade its on- and near-dock rail system. The carriers, in a complaint filed with the US Federal Maritime Commission, allege that the cargo handling fee would unfairly benefit rival carriers. Fees aimed at encouraging the use of rail transport have been in force since March 14 2011 and replaced the existing US$57.50 per box lift rail user fee. Hanjin Shipping To Receive Five 13,000TEUs Vessels Hanjin Shipping is set to receive five 13,000TEU vessels from an undisclosed shipyard at a cost of US$850mn. The vessels are scheduled to be delivered between Q112 and 2013. According to the carrier, the purchase will allow the expansion of its fleet size and in turn improve cost structure. The original order for these vessels was placed after a deal was signed with a non-operating shipowner in 2008 for the inclusion of post-Panamax vessels on charter for Hanjin.
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CSAV
Strengths In May 2010 CSAV became one of the world's top 10 container shipping lines, in terms of both market share and fleet capacity. Having entered the top ten in eighth position, CSAV is now in tenth place, with 2.7% market share, just behind Hanjin, with 3.1%. The Chilean carrier is long-established and is the biggest shipping company in the Americas. Weaknesses A Chilean mining company has bought a 10% stake in the company. CSAV is heavily reliant on charter vessels, potentially leaving it open to fluctuations in price. Despite its bailouts, CSAV still has significant debts, and it has reported a significant loss for H111. The line has cut some services in order to reduce costs, a dangerous strategy, as once lines have exited a route it is costly to return. The line is continuing to expand its fleet, exposing it to the threat of overcapacity at a time when the recovery in global container shipping is not yet assured. Opportunities Strong consumer domestic consumer demand in Chile should see increasing demand for imports of containerised goods. The company is in discussions on a route sharing agreement with CMA CGM and MSC, which could boost revenues while reducing its exposure to volatile rates. Threats Overcapacity is still putting downside pressure on rates and container lines have been unable to push through rate rises, which were the major factors behind the companies' revenue recovery. Peak season surcharges have also failed. Overview Rising fuel prices present a threat to shipping companies' bottom lines.
Compaa Sud Americana de Vapores (CSAV) was founded in Chile in 1872 and has been traded on the Santiago Stock Exchange since it opened in 1893. The company initially concerned itself solely with coastal shipping, but this soon grew to include the whole west coast of South America. This was later extended to include services to the US, then Europe, followed by the Far East, South East Asia and the east coast of South America. Today CSAV is the largest shipping company in the Americas, offering services transporting containers, dry bulk, fresh and frozen products, and vehicles to five continents. The Chilean carrier has the right specification of ship for carrying these varying cargoes, either owned by CSAV or chartered. CSAV has a large number of fixed itineraries through which it is able to provide year-round deliveries to various ports, and has in recent years introduced intermodal services, combining different modes of transport to provide a door-to-door package. This intermodal element is provided by CSAV's subsidiaries, Sudamericana Agencias Areas y Martimas (SAAM), a cargo-shipping agency, and COSAN, a container terminal in Santiago.
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Strategy
CSAV has announced losses of US$525mn for H111 and said it expects 'very significant' losses for 2011. In an attempt to claw its way back to the black, the line intends to raise US$1.2bn to counter lower shipping rates and higher oil prices, the company said on September 2. Luksic family's holding group, Quinenco, will finance US$1bn of the capitalraising drive; Maritima de Inversiones, of which CSAV is an associated company, will finance US$100mn; and shareholders will finance the remaining US$100mn. At the time of writing CSAV's share price ticked down to US$220.05, a considerable drop from its one-year high of US$639.44, achieved on October 28 2010. BMI's outlook for the box shipping sector remains bearish as capacity continues to outweigh demand. The fact that lines have been unable to make the traditional peak-season surcharge (PSS) for the Asia-Pacific route stick, further reflects the bleak outlook for the sector. Rates ticked up for the week ending August 19 2011, suggesting lines affiliated with the Transpacific Stabilisation Agreement (TSA) had managed to push through a PSS of US$180 per 40-foot equivalent unit (FEU). The surcharge did not hold for long, however. In the week ending August 26 2011 the transpacific rate fell by 0.96% week-on-week (w-o-w) and it has continued to fall since. In an attempt to protect itself from these kind of rates drops CSAV has implemented a twopronged strategy of cutting services and developing associations with other shipping lines to minimise exposure. In July CSAV cut its fourth route since the beginning of 2011 as it tries to manage the decline in rates. The latest route to be axed from CSAV's portfolio was the NACSA service linking the US Pacific Coast with ports in Latin America. In June it pulled its ASIAM Service, which linked India, South East Asia and China to the US West Coast, and earlier in 2011 the carrier dropped its Asia-US East Coast AMEX service following a decision to decrease exposure to the transpacific and Far East-Mediterranean route, where BMI notes rate declines have been particularly sharp. BMI considers this a dangerous strategy, as once lines have exited a route it is costly to return, as clients will move to other lines and carriers normally have to slash rates to win a new client base. Routes BMI hopes a recent tie-up with MSC will enable the carrier to halt its service-suspension tactic and allow it to retain its diverse route portfolio. The MSC-CSAV partnership will operate on three trade routes: Europe to west-coast South America, east-coast South America to the Mediterranean, and Middle East and South Africa to India and the Middle East. BMI notes that partnerships between container lines are a common strategy, born out of the 2009 global economic downturn. By linking up, lines are able to share operating costs by sharing vessel capacity. The carriers are therefore able to continue operating at the same level on services. We welcome the route-sharing plan, as it allows CSAV to continue operating popular routes while minimising its exposure to fluctuating rates. We also highlight that CSAV is looking to other routes that are less affected by overcapacity and offer high growth potential. In May 2011 it announced a new service to link Latin America with South Africa and Asia. Fleet The Chilean shipping company's twenty-foot equivalent unit (TEU) capacity was, as of
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September 2011, 430,786TEUs. CSAV's capacity is spread over 101 ships. Of these just ten ships, or 45,632TEUs, are owned by CSAV, which accounts for just 10.6% of the total TEUs of CSAV's fleet. The remaining 91 ships are chartered and make up the remaining 385,154TEUs. The carrier currently has four vessels on its orderbook, amounting to 36,000TEUs of capacity. This amounts to 8.4% of current fleet capacity. Financial Results H111 CSAV has announced losses of US$525mn for H111 and said it expects 'very significant' losses for 2011. In an attempt to claw its way back to the black, the line intends to raise US$1.2bn to counter lower shipping rates and higher oil prices, the company said on September 2. Q111 The company's net loss for Q111 was US$186.36bn. CSAV's volume of transported containers increased 6.8% month-on-month (m-o-m) in May, but the average revenue per container fell. The carrier transported 303,300TEUs in May, compared with 283,900TEUs in April. May container volume grew 35.7% year-on-year (y-o-y). CSAV said average revenue per TEU dropped by 3.3% month-on-month (m-o-m) in May, and was down 17.4% y-o-y. 2010 CSAV had a significant increase in liftings in 2010, up 61% from 1.79mn in 2009 to 2.89mn. Revenues were also up, by 80% from US$3.03bn to US$5.45bn. The company's performance went from a 2009 loss of US$656.4mn to a 2010 profit of US$170.8mn. The company's performance turned around on the back of its fleet growth and the increase in rates container companies were able to impose as trade rebounded over the first half of the year. However, even this turnaround in performance had not generated profit enough to clear CSAV's crippling debt. Que Pasa reported in March 2011 that losses of US$50mn had already been incurred by CSAV since the start of the year and that the company still owed South Korean company Samsung US$60mn to be paid by June. In a bid to avert any more crises the shipping company has announced it is to sell up to 49% of ports-operating subsidiary SAAM in order to raise capital. There was some positive news for the line in March 2011 with mining group Luksic's purchase of a 10% stake in CSAV. Latest Activity CSAV Announces Capital Increase For US$1.2bn CSAV has decided to increase its equity base in US$1.2bn having made a loss of more than US$500mn in Q1. As part of this plan, it has been proposed to the shareholders to split the freight shipping business from the vessels and cargo maritime services business, managed by its subsidiary SAAM. The company has also announced plans to find a strategic partner for the container shipping business.
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INDONESIA SHIPPING REPORT Q1 2012

Part of BMI's Industry Report & Forecasts Series

Indonesia Shipping Report Q1 2012

Business Monitor International Ltd

Indonesia Shipping Report Q1 2012

Global Overview ............................................................................................................................................. 10

Industry Forecast ........................................................................................................................................... 78

Business Monitor International Ltd

Indonesia Shipping Report Q1 2012

Company Profiles ........................................................................................................................................... 88

Business Monitor International Ltd

Indonesia Shipping Report Q1 2012

Headline Industry Data

Key Industry Trends

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Indonesia Shipping Report Q1 2012

Business Monitor International Ltd

Indonesia Shipping Report Q1 2012

Indonesia Political SWOT

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Indonesia Shipping Report Q1 2012

Indonesia Economic SWOT

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Indonesia Shipping Report Q1 2012

Indonesia Business Environment SWOT

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Indonesia Shipping Report Q1 2012

Business Monitor International Ltd

Indonesia Shipping Report Q1 2012

Lines To Enter 2012 In The Red

At A Loss Container Lines H111 Net Income (US$mn)

* Japanese data for Q1 of financial year. Source: Bloomberg, BMI

Business Monitor International Ltd

Indonesia Shipping Report Q1 2012

Business Monitor International Ltd

Indonesia Shipping Report Q1 2012

Business Monitor International Ltd

Indonesia Shipping Report Q1 2012

Source: Suez Canal Authority, Los Angeles Port Authority

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Indonesia Shipping Report Q1 2012

Overcapacity To Plague Medium Term, Beware 2013

Business Monitor International Ltd

Indonesia Shipping Report Q1 2012

Slowing Port Of Shanghai Container Throughput, 2007-2013 (TEU)

e/f = BMI estimate/forecast. Source: Port Authority

Business Monitor International Ltd

Indonesia Shipping Report Q1 2012

Source: Lloyd's List Intelligence

Business Monitor International Ltd

Indonesia Shipping Report Q1 2012

Table: Snapshot Of Container Lines' Orders

Company OOCL OOCL

Date Due 6 delivered by 2013, 4 more 1 delivered 2014 na

5- 8,000TEU 10- 8,000TEU

Due for delivery 2013 1 due for delivery 2013

na = not available/applicable. Source: BMI

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Indonesia Shipping Report Q1 2012

Signs To Watch For Tonnage Management Strategies

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Indonesia Shipping Report Q1 2012