Economic Outlook & the Impact on Shipping Gary Morgan Lloyd s Register IMSF 28 Gdansk, Poland European Dry Bulk Shipping Market Outlook
A few points before we proceed Globalisation is further complicating the balance of trade Dislocation between production & consumption The term decoupling is a contradiction in terms Very strong global economic growth since 21.. High domestic demand in emerging economies has supported trade thus far in 28 Productivity gains through integration into global economy Improving macroeconomic framework But Liquidity crisis settling down but fallout has been monumental OECD predicts sub prime losses to hit $42bn
Global economic growth Global Economic Growth - Advanced Economies Vs Emerging Economies Advanced economies Emerging and developing economies annual change (%) 9 8 7 6 5 4 3 2 1 Commodity intensive & export led economic growth 199 99 2 21 22 23 24 25 26 27 28 29 213 Data source: International Monetary Fund
Advanced economies..focus on US Advanced economies exercising less control over price due to location of manufacturing and raw materials Key economies suffering from Sub-Prime lending effects US export base expansion is sharp contrast to US domestic demand slowdown Weak dollar Housing crisis link between house price movement and consumer activity is strong price falls => reduction in consumer activity Still contribute to most of global GDP growth
Emerging economies High economic & population growth fuels increasing demand for energy Account for 9% of increased levels of consumption since 22 Supporting commodity intensive growth (exporters) Inflation is a key problem (most emerging economies raising interest rates) Intra regional trade rising substantially They are source of expansion in oil trades and dry markets Depending upon the location of supply and demand the required deadweight values are being pushed upwards (gross impact) BRIC accounted for 44% of global GDP growth during 27
China Maintain Strong Economic Growth Domestic growth fuelling further demand for commodities and energy Yangtze river development is a vital artery Inner China to economic development River, Roads and Railways Inward & Outward FDI ¾ of GDP derived by imports & exports activity (1) prevent over heating (2) Control food price inflation (2%yoy) proportion of trade with US falling (32% to 22%) Trading more intensively with Middle East, Latin America, Africa 6% growth in trade between BRIC during 27 Inflation a REAL risk => 7% (main source is food) Tight Monetary Policy
Risks of an economic slowdown Impact on trades What has happened in the past?
World output Vs World Trade World Output Versus World Trade Volumes 14 Volume of Trade World GDP Growth 6 12 5 % change 1 8 6 4 2 4 3 2 1 % change 9-99 (av) 2 21 22 23 24 25 26 27 28 29 Data source: International Monetary Fund
Oil Trade The health of the global economy is key
Oil 22 April 28 => $119.9 per barrel why? Supply OPEC stance Violence & political instability in oil producing nations Weak dollar investors look to oil and other commodities Increased demand (double edged..investment & price) Refinery capacity (shortage) Demand growth from emerging economies Why isn't price driving up increased production? After all, oil investment grew 7% from 24 to 26!!!
Crude oil prices ($/bbl) 12 Commodity Prices - Crude Oil 1 8 6 4 2 199-1 1991-1 1992-1 1993-1 1994-1 1995-1 1996-1 1997-1 1998-1 1999-1 2-1 21-1 22-1 $/bbl 23-1 24-1 25-1 26-1 27-1 28-1 Arab Light Brent Asian Financial Crisis 9/11 Gulf War Lebanon Conflict Iraq War Data Source: Clarkson Research
World Oil Production 1997 to 212 World Oil Production oil production change low (change) high (change) 5 45 4 35 3 25 2 15 1 5 1997 1998 1999 2 21 22 23 24 25 26 27 28 millions of tonnes 29 21 211 212 1.% 8.% 6.% 4.% 2.%.% -2.% -4.% % change (year on year) Data source: MSI ltd
Oil production 1991 to 28 Global & North American Oil Production 1 9 8 7 6 5 4 27-1 27-7 28-1 1991-1 1991-7 1992-1 1992-7 1993-1 1993-7 1994-1 1994-7 1995-1 1995-7 1996-1 1996-7 1997-1 1997-7 1998-1 1998-7 1999-1 1999-7 2-1 2-7 21-1 21-7 22-1 22-7 23-1 23-7 24-1 24-7 25-1 25-7 26-1 26-7 million barrels per day 9 85 8 million barrels per day North American Oil Production (LH Axis) Global Oil Production Global trend of increasing oil production driving up tanker fleet required deadweight...good for employment! 75 7 65 6 55 5 45 4
China..Production Vs Imports...increasing required deadweight 4 35 China Crude Oil Production Vs Crude Oil Imports What about the role of pipelines?! Production Imports 3 million tonnes 25 2 15 1 5 Growing disparity between production and imports will drive required deadweight upwards. This is good for employment! 23 24 25 26 27 28 29 21 211 212 Data source: MSI ltd
Tanker Market Fundamentals 12% Tanker Market Fundamentals 1% 8% 6% 4% 2% % -2% 199 1991 1992 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 217 218 219 % change year on year 22-4% -6% 1% 95% Employment Rate (%) fleet supply growth employment (demand) growth Employment Rate 9/11 Asian Financial Crisis Acute over supply 9% 85% 8% 75%
Dry Bulk Trade If China suffers from a US recession...dry bulk trades will suffer
Steel production in China 1997 to 28 China Steel Production 24% ave. yoy growth since 22 million tonnes / month 5 45 4 35 3 25 2 15 1 Average ore imports during 27 were c.33 MnT month...meaning China alone requires around 19 Capes every month 5 1998-1 1999-1 2-1 21-1 22-1 23-1 24-1 25-1 26-1 27-1 28-1 8% of global steel production growth down to China (28-212) Data source: Clarkson Research
Iron Ore Trade..vessel employment 21 25 Iron Ore Trade and Vessel Employment million deadweight 2 15 1 Capesize fleet development Iron Ore Required Deadweight (Capes) Case 1 Iron Ore Required Deadweight (Capes) Case Miner Conversions 5 8% fleet in ore trade If China s Iron Ore imports grow at same CAGR for 23 27 then the market can absorb the Capesize tonnage 23 24 25 26 27 28 29 21
Capesize bulk carrier earnings (spot & TC) Bulk Carrier Spot & TC Earnings since 22 $/Day 25, 2, 15, 1, Modern Capesize Ave. Spot Earnings 1 Year TC Rate 17k dwt BC 3 Year TC Rate 17k dwt BC Modern Capesize Earnings Tubarao / Baoshan 165k 199-2 15k $/day (av.) 23 to date 65k $/day 5, 22-1 23-1 24-1 25-1 26-1 27-1 28-1 Data source: Clarkson Research
Containerised Trade
Container market outlook demand growth Seaborne Unitised Cargo 4,5 4, Containerised cargo is predicted to treble by 22 3 million tonnes 3,5 3, 2,5 2, 1,5 Orderbook is huge.6% of fleet size Container demand growth highly correlated to economic growth by factor of 3 to 4 1, 5 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 214 216 218 22 25 2 15 1 % of 27 value 5 Data source: MSI ltd
Container Ship Fleet Development Size of Container Ship Fleet 4 35 3 25 2 15 1 5 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 million TEU 212 214 216 218 22 FC Total Fleet (million TEU) An Gr Rate (%) RH Axis Ave An Gr (198 to 22) 18 16 14 12 1 8 6 4 2 Data source: MSI ltd
Keep an eye on..
Inflation - the prognosis for 28 14 Inflation - CPI Developing Asia European Union Middle East Advanced Economies 12 change (% year on year) 1 8 6 4 2 2 21 22 23 24 25 26 27 28 (f) Data source: International Monetary Fund
The World in 23. Long term economic outlook is key to shipping industry Export level to rise from $9tr to $27tr World population to increase by 1.5bn Globalisation and urbanisation will heavily influence the industry outlook Trade developments / requirements Specialisation
Conclusions Uncertainties are rife.. Economic, Political & Environmental The orderbook => how reliable beyond 18 months? Strong demand growth will be essential for sectors where fleet supply growth rates are aggressive Many challenges Shipbuilding expansion Korea / China Industry resources stretched => shortages.. People & Expertise, Materials, Components & engines Geo-Political & Environmental (Wars / Terrorism) INFLATION!!!
Thank you for listening Gary Morgan Market Analyst BA (Honours) Economics MRes (Distinction) Marine Technology Telephone 44 ()27 423 2725 Mobile Services are provided by members 44 of the ()777 Lloyd s Register 926 Group 9953 Lloyd s Register, Lloyd s Register EMEA and Lloyd s Register Asia are E-mail exempt charities under the UK Charities Gary.Morgan@lr.org Act 1993. The Lloyd s Register Group works to enhance safety and approve assets and systems at sea, on land and in the air because life matters.