SHIPPING MARKET REVIEW - shipfinance.dk

1 SHIPPING MARKET REVIEW MAY 2016 DISCLAIMER The persons named as the authors of this report hereby certify that: (i) all of the views expressed in the research report accurately reflect the personal views of the authors on the subjects; and (ii) no part of their compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in the research report. This report has been prepared by Danish Ship Finance A/S (Danmarks Skibskredit A/S) ( DSF ). This report is provided to you for information purposes only. Whilst every effort has been taken to make the information contained herein as reliable as possible, DSF does not represent the information as accurate or complete, and it should not be relied upon as such. Any opinions expressed reflect DSF s judgment at the time this report was prepared and are subject to change without notice. DSF will not be responsible for the consequences of reliance upon any opinion or statement contained in this report.

2 This report is based on information obtained from sources which DSF believes to be reliable, but DSF does not represent or warrant its accuracy. The information in this report is not intended to predict actual results, and actual results may differ substantially from forecasts and estimates provided in this report. This report may not be reproduced, in whole or in part, without the prior written permission of DSF. To Non-Danish residents: The contents hereof are intended for the use of non-private customers and may not be issued or passed on to any person and/or institution without the prior written consent of DSF. Additional information regarding this publication will be furnished upon request. JOIN OUR LINKEDIN GROUP SHIPPING MARKET REVIEW by Danish Ship Finance Sign up to our LinkedIn group SHIPPING MARKET REVIEW by Danish Ship Finance to continue reading our SHIPPING research. If you are not using LinkedIn please contact your relationship manager in Danish Ship Finance for a copy of the report.

3 HEAD OF RESEARCH Christopher Rex, ANALYTICAL TEAM Mette Andersen Ninna Kristensen TABLE OF CONTENTS SHIPPING MARKET REVIEW MAY 2016 EXECUTIVE SUMMARY, 7 GENERAL REVIEW AND OUTLOOK, 14 SHIPBUILDING, 29 CONTAINER, 43 DRY BULK, 54 CRUDE TANKER, 68 PRODUCT TANKER, 79 LPG TANKER, 90 GLOSSARY, 101 EXECUTIVE SUMMARY SHIPPING MARKET REVIEW MAY 2016 EXECUTIVE SUMMARY Please read the disclaimer at the beginning of this report care-fully. The report reviews key developments in SHIPPING markets and the main SHIPPING segments during the period November 2015 to May 2016 and indicates possible future MARKET direc-tions. The first section of this report our General REVIEW and Out-look is intended to promote discussion of the medium to long-term drivers of the SHIPPING industry. Some investors seem to believe that past dynamics remain intact and that the SHIPPING industry will be on its way out of the doldrums in a year or two.

4 We certainly hope that these expectations come true. But we urge our readers to consider some of the structural challenges that we believe are transforming the long-term outlook for many parts of the SHIPPING industry. We highlight some global perspectives that might serve as an outlook: from energy to manufacturing to construction. The fourth industrial revolution is disrupting some very basic mechanisms that have been facili-tating massive growth in seaborne trade volumes over the past decades. These mechanisms could become outdated sooner than many people expect. We present a discussion of the potential issues that may or may not come into play within the lifetime of vessels recently ordered. Throughout this section we apply a macroeconomic perspective to the SHIPPING industry. This methodology allows us to analyse the main long-term trends, rather than to focus on the short-term industrial outlook.

5 Accordingly, our approach is not intended to identify all short-term opportunities for sud-den MARKET improvements. Rather, we present prospective trends that may or may not have a major impact on the ship-ping industry: some of these will play out, while others will be overtaken by alternative scenarios or the status quo will pre-vail. We strive to provide a clear-eyed perspective on how to navi-gate the changing demand landscape. Still, it is important to keep in mind that long-term trends only define the dynamics in play. These dynamics may easily be outgunned by temporary forces defining short-term demand. Even in oversupplied mar-kets, the temporary forces may become sufficiently powerful to raise freight rates and secondhand values over several months, sometimes even longer. We urge our readers not to interpret short-term spikes as signs of a more lasting recovery and re-frain from ordering new vessels.

6 In the Tanker segments the low growth in underlying demand is being overshadowed by the ongoing and scheduled capacity expansions of production facilities ranging from refineries to steam crackers to propane dehydrogenation plants (PDH). These expansions have ensured high freight rates and increas-ing secondhand values over a period. The lesson to be learned from the current and previous ship-ping cycles is that occasional spikes in freight rates do occur, even in downward trending markets. There is little to indicate that these spikes will be sustained for years, but that is not always necessary they only need to last long enough for owners, investors or their banks to be able to rearrange their positions. These occasional spikes in freight rates will continue to occur in the years to come despite our expectation that sev-eral SHIPPING segments will face low freight rates, persistently low secondhand values and a short- to medium-term outlook where the risk of escalating overcapacity cannot be ignored.

7 For those investors considering entering the SHIPPING markets in the years to come, we have a single message to deliver: freight rates are the only indicator of the state of a MARKET . Newbuilding prices reflect the bargaining power among the yards that attract new orders but tell us nothing about the yards that are struggling to survive. And forget about the as-sumption that newbuilding prices reveal the MARKET s long-term earnings expectations that simply does not apply in markets where there is overcapacity. Secondhand values are driven by hopes, fears and expectations. In today s markets, where ves-sels are being scrapped prematurely, secondhand prices may stay at the current low levels for quite some time even if freight rates improve. The explanation is simple: increased earnings Danish Ship Finance (Danmarks Skibskredit A/S) SHIPPING MARKET REVIEW - May 20167 are likely to be absorbed by a shortening of the economic life of the vessel.

8 The mean-reverting nature of the SHIPPING industry will only return when the balance between supply and demand has been restored. We urge you to read the General REVIEW and Outlook section and apply the long-term trends discussed to the various ship-ping segments to determine your own view on the impact they could or will have. GENERAL REVIEW AND OUTLOOK Our SHIPPING MARKET REVIEW May 2016 is devoted to the fourth industrial revolution. To understand the truly disruptive nature of the fourth industrial revolution, we cannot simply look at the disruptive technologies in isolation. We need to see the new dynamics from the right perspective. It is important to understand that two major tectonic plates underneath the glob-al economy are shifting. WEALTHY CONSUMERS ARE ABOUT TO RETIRE The first tectonic plate that is moving is the number of con-sumers powering the global economy and seaborne trade.

9 The global population continues to rise, but major demographic shifts are changing the underlying forces of the global econo-my. Wealthy consumers in developed economies and China are about to retire and are being replaced by plentiful but relatively poor emerging consumers elsewhere. This transformation is expected to have a major impact on trade flows and trade dy-namics. Still, many argue that this replacement will pave the way for continued improvements in seaborne trade volumes. THE FOURTH INDUSTRIAL REVOLUTION IS CREATING FEWER JOBS From a structural perspective, we tend to agree, but we see little to indicate that this potential will materialise within the next decade or two. There are many countries that have vast and unfulfilled demographic potential, but it seems that the fourth industrial revolution is hampering their ability to create the millions of jobs needed for them to become global consum-ers.

10 We argue that China may be among the last emerging economies to be able to ride the wave of industrialisation to middle-income status through job creation in the manufacturing sector. URBANISATION MAY BECOME LESS TRADE-INTENSIVE The second tectonic plate in motion is the supercharger of the global economy and seaborne trade: urbanisation. Clearly, the urbanisation process is continuing, but it is diverging from past trends and is tending to follow new routes that give individual consumers access to more goods using fewer resources (includ-ing energy) and requiring less seaborne transportation. WE NEED TO RESET OUR INTERNAL NAVIGATION SYSTEMS Global value chains are expected to shorten: from raw materi-als to intermediate goods to finished goods. Trade dynamics and trade patterns are expected to be redefined. Seaborne trade volumes may stagnate or begin to decline.