British Shippers’ Council 03 July 2013, London

British Shippers’ Council03 July 2013, London Mike Garratt & Edwin Velterop BoxTradeIntelligence 213038_presentation_8

1. Paper will consider: • Trade analysis for the European market • Estimated TEU from the Far East and N America to N Europe & Med by commodity group, 2000-2013 • Demand v. Capacity: global market and routes crossing the Suez Canal • Effect of market concentration • Freight rates and costs: interpreting the data (case study for tyre and for the Asian market) Using data from MDST/Box Trade Intelligence databases

2. Trade analysis: European market • Europe a declining proportion in all market sectors • A consequence of gradual de-industrialization • European share down from 30% to 23% of container trades • A reflection of growth between developing countries

3. The unit load market • The rapid growth from Far East has stalled • volumes in 2011 exceeded pre-recession 2007 levels • but imports stalled in 2012 and are now falling • Deep-sea import substitution also stalling • Alternative sources emerging from Turkey/Eastern Europe etc. • Turkey to Europe grew 22% between 2011Q1 and 2013 Q1 (all modes) • Important implications for freight transport network development across Europe • but not encouraging for deep-sea terminals

4. Unitised imports into Europe by commodity sector, mTEU 2007 – 2013 • Imports into Europe from the Far East in decline for all commodity in 2013 • Increase in imports of industrial goods into Europe from North America

5. Headhaul capacity (v. demand) by ship class • Underlying demand grew +22% 2008 to 2012 • Global capacity grew +18% 2008 to 2012 • so until recently a gentle upward pressure on rates

6. Modelling liner service economics: - Suez routes Oversupply likely to lead to falling rates despite withdrawal of some older ships • Based on modelled experiences of period 2006-2012

7. Impact of falling utilisation on freight rates reduces earnings/ship day (Suez example) • Withdrawing 3-5,000 TEU vessels only cuts capacity by 7% • Inadequate to balance supply and demand • But larger ships can remain profitable at lower rates

8. Effect of market concentration: current deployed capacity E/W trade lanes

9. Effect of market concentration - deployed capacity shares • Current service capacity of three major East-West trades (‘headhaul’ direction):46m TEU p.a. - largest alliance (CKYH Alliance): 8.8m TEU - but in 2014 P3 could offer: 14.5m TEU - of which Far East-Europe: 8.4m TEU

10. Effect of market concentration- Asia/Europe Trade Lane

11. Effect of market concentration – P3 • Follows other market concentration efforts like the G6 • All subject to final agreements and regulatory approvals • Operated through an independent Fleet Operating Company based in London, with subsidiary in Singapore • Employing around 200 people; majority in London • Tremendous challenges to align operational structures • Not new, just the scale is! • Earlier examples are the Tonnage Centres of the 1990’s (TRIO, TSA), where services where jointly operated, including ship planning • Significant regulatory hurdles • even if shippers simply experience 'code-sharing' and price competition remains, supply will be curtailed through ships being returned to owners • terminals and independent ship owners will face a dominant purchaser (P3) of their services that also owns its own ships and terminals • Shipper organisations need to be well informed on liner cost structures

12. Freight rates and costs: interpreting the data • Global deep sea traffic in tyres has been growing • But do freight rate changes reflect falling unit costs? • Those changing unit costs combine - fuel costs which are independent of the industry - the reaction to those falling fuel costs by trading off against an emerging surplus of shipping capacity (slow steaming) - the return on capital from fewer but larger ships • Freight rates (on the other hand) reflect market forces in a market that is inevitably imperfect and tends towards oligopoly • What should be the shipper’s approach? - to follow the freight rate roller-coaster or - negotiate on the basis of shipping cost structures

13. Example of the tyre industry A bulky product for which freight costs are crucial • Largest increase estimated for routes where use of larger ships further reduces costs: • North America to Gulf/ISC • Far East to Africa • Far East to Latin America • Far East to North America and Europe

14. Tyres analysis – Global trade, immediate future forecast • Overall trade in tyres increased by 60% between 2006 and 2012 (8% p.a.) • Tyres follow economic cycle • Far East expanding market share • A very large market: 4m TEU out of 125m TEU globally (3%!) • Demand stable in 2013 • Inevitable pressure to reduce all production costs, including shipping. • In 2006 we estimate freight rates ex Asia represented 14% of imported values

15. Asian trades modelled (excluding intra services): all commodities costs constant freight rates constant profit rises significant input cost

16. Asia-Europe spot rates (SCFI) – Trend in 2013 Same level observed in 2012

17. Lessons for shippers: 2006 to 2012 • Shipping costs form a significant proportion of delivered prices and therefore a key element in exporters’ success • Mean shipping tariffs/TEU absolutely stable and associated shipping costs fell by 1% despite bunkers prices more than doubling • Without radical investment and change in practice model suggests shipping costs would instead have been 39% greater • Every reason to suppose that use of even larger ships will lead to further falls in freight rates given a competitive environment - as smaller ships driven out/cascaded to maintain load factors • So what does benchmarking on rates achieve? - by definition half will be ‘losers’…and the other half lucky! • Surely better to reduce volatility and uncertainty through long long-term relationships based on transparency • Because costs do reflect medium term rate structures and can be the basis of longer term contractual relationships

18. Using Tools • Although we regularly perform the previous bespoke commodity based calculations, it is also possible to perform these calculations on a regular basis for various Trade Lanes. • Demand, Supply, Shipping Costs and Ocean Freights can simply be compared on a quarterly basis. • To enter into meaningful long term discussions with the Shipping Lines, any reference to weekly and even monthly freight rates are unhelpful and only serve those parties interested in profiting from the (almost self fulfilling) freight rate volatilities. • Our Tools can be used during shipping negotiations, or can even be used to form a baseline for freight rates that can move with the changes over the time of a shipping contract

19. Tools: Asia-Europe example • Demand v. Capacity

20. Tools: Asia-Europe Freight rates v. Costs

21. Tools: Asia-Europe cost structure

22. Summary • Container market is continuing to grow - but the supply side is growing faster • That growth is driven by competitive pressure to deliver lower cost solutions through scale: - which in a competitive environment can only result in falling rates and cascading of ships to smaller routes • Without consolidation, market forces will therefore further reduce rates - a scenario likely to be resisted by the lines - creating uncertainty that cannot encourage trade! • Opportunity available to address that uncertainty by analysis of shipping line cost structures - regarding shipping as just one more input in the production process. • A more informed approach than hedging • But impact of P3 further adds to uncertainty! • Tools are available to better inform shippers

For more information including online data services http://www.boxtradeintelligence.com http://www.mdst.co.uk

British Shippers’ Council 03 July 2013, London