THE GLOBAL ECONOMIC CRISIS: SOME THOUGHTS ON

CONSEQUENCES FOR SEA TRANSPORT MARKETS AND THE SOUTH AFRICAN PORTS SECTOR

Outline & way forward• Global sea transport markets: from “perfect boom” to tailspin

– Overall outlook– Dry-bulk shipping– Containerised/unitised trades– Tanker trades

• South African sea trade and port activity– Liner shipping and the container trades– The dry-bulk trades

• Other port-ancillary activity– Support networks for transit traffic– Ship-repair

The Maritime Transport Industry in 2008

A “once in a lifetime” year for the international maritime transport industry (Martin Stopford/Clarksons)

• Dry-bulk markets at unprecedented all-time historic highs at mid-year (bulk freight rates 1500 per cent higher than in 2001)

• Seemingly insatiable demand for bulk staples (PRC the principal driver)

• Sustained demand growth for containerised liner cargoes (double digit annual growth the norm)

… and all of this precipitating an ORDERING BOOM for new tonnage of breathtaking proportions future avalanche of capacity to cascade onto freight markets over 2009-2011/12

….but from Q3, 2008 onwards…

the “perfect boom” became a dizzying downward spiral in most major market segments

• In dry-bulk markets the BDI dropped from nearly 12,000 in late-May to 660 in early-December – a loss of ~94% of its value

• Freight index levels for large “Cape-sized” bulk carriers fell from nearly 20,000 in mid-year to 840 in December – a 96% fall

• Charter rates for container vessels fell by two-thirds

• Box rates fell significantly on major liner routes, most notably east-west, northern hemisphere arterial routes

• Tanker markets were more resilient, but rates still fell roughly 50% from Q2 to year-end (still acceptable rates for owners, though)

Dry-Bulk Freight Rates: 1998-2009

0

5000

10000

15000

20000

25000

Years

BDI Panamax Cape

Rates outlook? No sustained recovery around the corner – the supply “tortoise” outpacing the demand “hare”

DEMAND prospects for 2009:

• Small negative growth in “major” bulks (iron ore, coal, grain, Morgan Stanley) – but not necessarily for SA

• Small increases in “minor” bulks• Overall “flatlining” bulk market (Fairplay)• Container demand growth 1-2% in 2009; 2-5% in 2010

(Fairplay) – but not necessarily for SA• Oil & Petroleum product demand fairly income inelastic, but still

static outlook

SUPPLY outlook fairly devastating

• New orders evaporated

• Some cancellations of existing orders, but little effect on 2009 deliveries, and little change in overall order book by Feb 2009

• Cascade of newbuildings likely to damp down any market recovery, as long as order book so overwhelming, presently standing at:

– Roughly 49% of the current cellular container fleet (quite youthful)

– More than 60% of the present dry-bulk fleet

– “Only” 44% of the existing tanker fleet (and with some enforced deletions of single hulls after 2010

– Any wet to dry conversions (VLCCs to VLOCs?) exacerbating the dry-bulk market balance

• Increased scrapping needed urgentlly, but limited by:

– Capacity problems in shipbreaking yards

– Credit squeeze for breakers

– Environmental pressures

… and the size of the global order book suggests that a recovery of freight rates is not around the

corner

Vessel type Order book (million dwt)

Jan 2003

Jan 2006

July 2007

Dec 2008

Tankers 67.0 105.5 178.0 191.1

Bulk carriers 30.2 68.4 152.4 293.6

Container 14.2 52.5 68.4 77.6

General cargo 4.4 8.9 16.3 13.7

Passenger 0.4 0.6 0.8 0.8

Total on order 116.2 235.9 415.8 576.9

Total World Fleet 816.4 944.5 1049.5 1171.0

Order book as % of global fleet

14.2 25.0 39.6 49.3

What prospects for freight rates?

• End-2008/early-2009 rates probably unsustainable (< variable costs)• Some short-term rates recovery therefore very probable, but..• Apart from feeble “spikes”, probable rates convergence around breakeven

levels until a semblance of demand-supply balance restored, and perhaps groping towards:– $9,000/day for smaller vessels;– $11,000/day for Panamaxes; and– $13,000/day for Capes; or – Consistent with a BDI standing around 2,200-2,300 (and we seem to be

getting towards that)• Broadly similar story in the liner trades, with some talk of “rates restoration”

on some major routes• Fairly sombre outlook but from a better base in the oil/petroleum trades

(though limited short-term direct impact on S A ports)

South African Ports

Two major drivers of port activity, and SA a substantial seaborne trading nation

• Total port activity of 237.7 million tonnes of all commodity types – or approximately 3.2% or global seaborne trade volumes; considerably more in “real” tonne-mile terms

• Significant dry-bulk activity, dominated by coal and iron-ore (together roughly 95 million tonnes)

• Considerable containerised traffic of some 3.9 million TEU or roughly 52.6 million tonnes1

(also very rapidly growing trade in fully built motor vehicles)

1. Official Transnet data provides TEU magnitudes only; tonnages calculated on basis of average 13.5 tonnes/TEU

Containerised sea trade activity

Some characteristics

• Fastest-growing component of seaborne trade

• Containerised port activity typically outruns GDP growth on sustained basis– Elasticity coefficients of ~1.5 for SE Asia (Gilman et al)– Higher 1.6-2.0 in Oz– Higher still – 2 to 3 - in SA (Muller, 2005)

• Principal drivers– Growth of real GDP– Exchange rate– Container penetration ratio (high but falling in SA?)– Import/Export balance, but some surprises regarding incidence of empty containers

South African containerised sea trade

elasticities: 2004-2008 2004 2005 2006 2007 2008

Container traffic (TEU)1

2632771 3014236 3416780 3712090 3900319

Annual growth TEU volumes

9.0% 14.5% 13.4% 8.0% 5.1%

Annual growth real GDP2

4.9% 5.0% 5.3% 5.1% 2.2%

Container trade elasticity coefficients

1.84 2.90 2.53 1.57 2.32

1. TNPA data, various years2. S A Reserve Bank, Quarterly Bulletin, December 2008

S A seaborne trade outlook – wildly speculative

The bad news……

• Significant slowdown of containerised port activity– Muted 2009 growth outlook for SA economy (1.2 percent – Trevor Manuel;

1% - Standard Bank; 0.4% Nedbank; -0.5% to 1% - others)– Little to energise container seatrade elasticity– Some pruning of vessel capacity (SAECS second string; SAFARI Loop 2)– Reduction in port congestion (a window of capacity planning opportunity?)

• Bleak outlook for automotive trades?– Income-elastic demand– Postponement of durable expenditure

Possibly better news in the major bulks…

• Low/falling freight rates can be good news for long-haul major bulk routes, because– Sea freight costs as a percentage of final user costs (“shelf price”)

fall, and this in turn– Increases the relative competitiveness of long-haul, lower-cost

supplying regions; and– Decreases the relative competitiveness of shorter-haul, higher-cost

supplying regions

• Critical role of PRC?– Oz versus SA steam coal, iron-ore?– Brazilian versus SA iron-ore to western buyers?

Polish Coal $/tonnePrice fob or for 65Rail freight 5Local distribution 8Total distribution cost 78

Polish coal supplier wins!

South African coal $/tonnePrice fob 50Sea freight, May 2008 47Local distribution 8Total Distribution cost 105

…but (ceteris paribus)..Sea freight, Jan 2009 7Total Distribution cost 65 S A coal exporter wins!

LONG-HAUL versus SHORT-HAUL TRADES – LONG-HAUL versus SHORT-HAUL TRADES – a hypothetical example of Polish and South a hypothetical example of Polish and South African sized coalAfrican sized coal

Other impacts on the SA ports community

Increased transit traffic around the Cape sea route, arising from:

• Piracy and instability around the Horn of Africa– One-off random shock, unsustainable?

• Cost cutting behaviour on the part of carrying lines– Insurance/risk premia mitigation– Avoidance of Suez Canal dues ($700,000 per transit for top-end post-

Panamax boxboat?)– Reduction of fuel bills (“cube” rule)

• Eased market/demand pressures, such that carrying lines might– Tolerate longer hauls– Tolerate reduced sea speeds (29-knot MAERSK B…. Greyhounds?)– Enjoy capacity-enhancing effects of lower port congestion

…. and consequently offering some windfall gains for some important economic actors in South African

port “clusters”

• Port-ancillary service providers– Ships’ agency operations– Offshore suppliers– Ship chandlers– Crew changes, etc

• Ship repair industry– Major employment multipliers and industry linkages– Transit vessel sizes a challenge

• Bunker Industry

• In the longer term, perhaps also cargo owners, through– Larger & more efficient vessels with lower unit costs of transport– Greater competition in liner trades

Short-term outlook generally quite bleak, but not blanket gloom