A snapshot of the economic and shipping environment

China’s  unexpected  move  to cut  rates  for  the  second  time  in less  than a month  reveals  how  worried
slowdown extends beyond the euro are. The People’s Bank of China cut its one year lending rate by
0.31%  points  to  6%,  while  the  European  Central  Bank,  as  expected,  cut  its  main  interest  rate  by  a
quarter points to 0.75%, the lowest on record and the Bank of England restarted money printing and
injected an extra £50bn into the UK economy, increasing the total to £375bn.
A factory slump in Asia’s two biggest exporters, China and Japan, deepened in June, as export orders
fell  to  a  seven  month  low,  highlighting  increased  worries  that  the  health  of  the  global  economy  is
deteriorating.  China's  manufacturing  activity  fell  to  a  seven-month  low  in  June,  according  to  official
figures, despite  government efforts  to  arrest a  slowdown  in  the  world's  second largest  economy.  The
official  purchasing  managers'  index  (PMI)  slipped  to  50.2  in  June  from  50.4  in  May,  the  China
Federation of Logistics and Purchasing said in a statement. June’s figure marks the lowest level since
November  last  year,  when  PMI  hit  49,  according  to  previously  released  data.  A  PMI  value  above  50
indicates expansion, while a reading below 50 means contraction.
In the meantime, unemployment in the eurozone hit a fresh record high of 11.1% in May, form 11% the
previous  month,  according  to  EU  statistics  from  Eurostat,  while  manufacturing  Purchasing  Managers’
Index has been stuck at 45.1 in June, indicating contraction. May’s unemployment rate is the highest
since euro was launched in 1999 and adds further urgency to the eurozone countries’ plan to create
economic  growth  and  cut  excessive  government  debt.  Unemployment  rate  in  the  eurozone  is  higher
than the rate of 8.2% in United States and 4.4% in Japan and it is expected to rise further in the coming
months as eurozone’s economy slides to a further recession.
At  Euro’s  summit  last  week,  eurozone  leaders  have  already  agreed  on  a  direct  bank  recapitalization
from European bailout funds and a generally long term plan for a tighter budgetary and political union to
prevent further expansion of the sovereign debt crisis.
In  Greece,  Deputy  Finance  Minister  confirmed  that  Greece's  new  government  intends  to  honor  its
commitments under the terms of its latest European-led bailout by adding that the government’s aim is
to revive country’s economy without missing the MoU targets. IMF Managing Director Christine Lagarde
said the current troika mission in Greece is not about renegotiating the terms of the bailout agreement,
with Greece dropping its plan to seek softer terms for its second bailout falling warnings that it would be
rejected  by  international  lenders.  The  release  of  the  EUR4.2bn  tranche  of  the  new  bailout  loan  is
postponed until EU officials publish a new report on the status of Greek economy.
In France, the government needs to make “unprecedented” cuts in public spending to reduce its budget
deficit to 3 per cent of gross domestic product next year and eliminate the deficit by 2017, as the country
is in the danger zone and the risk of a surge in the debt can not be excluded. Furthermore, Germany’s,
the euro largest economy, manufacturing activity showed its fastest contraction since June 2009, while
eurozone’s manufacturing activity has contracted each month since August 2011. 
In U.S., manufacturing activity also contracted for the first time in three years reassuring that the global
economy is already suffering seriously from the eurozone debt crisis and China’s economic slowdown.  
In a shock to economists, who were expecting manufacturing growth to slow moderately, the Institute for
Supply Management’s survey on the US industrial sector reported a large decline in activity from 53.5 in
May  to  49.7  in  June,  its  lowest  level  since  the  recession  ended  in  mid-2009.  The  weak  ISM  data
emerges from China’s slow pace of industrial expansion, while eurozone manufacturing activity remains
at its weakest level in three year.
SHIPPING MARKET
 
Under the adverse worldwide economic scene, shipping investments haven’t lost their momentum amid
the tight ship lending conditions from the eurozone sovereign debt crisis. Overall confidence levels in the
shipping  industry  increased  in  the  three  months  ended  May  2012,  to  reach  their  highest  level  since
February  2011,  according  to  the  latest  Shipping  Confidence  Survey  from  leading  accountant  and
shipping consultant Moore Stephens.This is the fourth successive quarter in which there has been an
improvement  in  confidence,  leading  to  an  increased  expectation  of  new  investments  on  the  part  of
respondents, despite an anticipated increase in the cost of finance over the next twelve months. In May
2012, the average confidence level expressed by respondents in the markets in which they operate was
5.7 on a scale of 1 (low) to 10 (high), compared to the figure of 5.5 recorded in the previous survey in
February 2012, and to the 5.6 recorded one year previously, in May 2011. The survey was launched in
May 2008 with a confidence rating of 6.8.
Interesting  companies’  news  of  this  week  was  the  filing  of  bankruptcy  from  Japan’s  oldest  shipping
firms, Sanko Steamships, after months of battling with ship owners over the restructuring of $2 billion in
debt, while in the tanker segment a merge deal has been revealed between National Shipping Co of
Saudi  Arabia  and  Saudi  Aramco’s  Vela  division,  both  state  owned,  which  will  create  the  third  VLCC
owner in the world. The merger of the National Shipping Company of Saudi Arabia (Bahri) and Saudi
Aramco shipping arm Vela International Marine is set to create a major new force in the tanker industry.
Bahri  signed  a  memorandum  of  understanding  this  week  with  Saudi  Aramco  in  which  the  national
shipping  company  would  pay  $1.3bn  to  take  over  the  fleet  of  Vela.  Bahri  would  then  become  the
exclusive provider of VLCC shipping services to Saudi Aramco. The two companies said they plan to
explore ways to expand their cooperation in the maritime sector.
“We strongly believe that the proposed transaction presents Bahri with a unique opportunity to further
diversify its business model and reinforces our ability to satisfy Saudi Aramco’s transportation needs as
well as continuing to serve other customers,” Saleh Al-Jasser, ceo of Bahri said. Saudi Aramco sees the
merged  entity  creating  a  new  force  in  the  global  shipping arena.  “By  creating  a  new  global  leader  in
shipping,  Saudi  Aramco  hopes  to  build  a  strong  company  that  can  leverage  its  capabilities  in  the
shipping sector and would meet its growing business portfolio,” said Khalid Al-Falih, president and ceo
of  Saudi  Aramco.  “This  company  in  turn  will  serve  as  a  national  champion  that  will  promote  the
development of a thriving national maritime industry that creates jobs and other long term opportunities
for the Kingdom.” The deal requires regulatory approvals and the two companies said they would work
towards having definitive transaction documentation by the fourth quarter of the year and completion in
2013.
In the dry market, the second quarter of the year ended with a positive sense as the Baltic Dry Index
finally broke the psychological barrier of 1000 points from its continuous fall during May, by closing on
June 29th at 1004, down by 38% from January 3rd at 1624 points, with capesize average spot charter
earnings showing a fall of more than 80% by reaching levels of $3,988/day, from about $24,000/day at
the beginning of the year. On mid June, capesize average spot earnings fell at their lowest point since
December 2008, of less than $3,500/day, with panamax vessels showing softness at levels of less than
$8,000/day from more than $13,000/day at the beginning of May.  
During  the  first  days  of  July,  BDI  continues  its  upward  trend  with  capesize  average  spot  earnings
surpassing the barrier of $5,000/day and panamax earnings climbing to more than $8,000/day. Smaller
vessel  categories,  supramax  and  handysize  units  are  showing  firmness  at  levels  of  more  than
$13,000/day and $10,000/day respectively. The positive performance of smaller vessel categories has
been supported by increased movement of grains and a number of minor bulk cargoes, while the fragile
Chinese iron ore and coal demand impaired the demand for capesize and panamax tonnage. Chinese
demand  for  imported  iron  ore  cargo  posed    weakness  in  June  due  to  a  tremendous  decline  in  steel
production and a large amount of iron ore stockpiled at Chinese ports, despite the rise of Chinese iron
ore imports in the first five months of the year to around 300.1mt, up 9% year-on-year.
The recent euphoria in the capesize and panamax segment has pushed BDI above 1,000 points, but the
prospects for the second half of the year are not yet promising for the capesize segment and overall the
performance  of  the  dry  market.  Chinese  steel  production  has  not  yet  recovered,  port  stockpiles  are
elevated, above 96 million tons of iron ore and 8.7 million tons of coal, while Chinese iron ore demand is
expected to show not significant strength in the coming weeks. Chinese demand for imported thermal
coal is also poised to remain low on the short term, as power plant and coal stockpiles remain high and
hydropower  production  continues  to be  on  rise.  However, peak  summer electricity demand season  is
underway in China and a rebound in thermal coal fixture volume is likely for the second half of the year
with stronger panamax earnings. Top grade iron ore price shows sings of weakness with the benchmark
62% iron ore content price falling to $135/tonne as Chinese steelmakers have reduced their purchases
from declining steel production that has hit the iron ore supply chain.
Despite the recent negative picture of capesize ton mille demand, there is still faith in the segment as
Chinese government’s stimulus measures in the industrial sector may bring firmer iron ore demand, but
it seems difficult the capesize average spot earning to surpass the levels of $10,000/day as they are
struggling  to  perform  in  the  current  vessel’s  supply  figures,  when  in  December  of  2011,  they  were
floating at levels near to $30,000/day. Under the current fundamentals, shipping players prefer to move
towards  the scrapping  of  overaged large sized  vessels,  capesizes  and  panamaxes,  with  secondhand
investments being on the frontline as more preferable type of investment than the construction of new
units.
Secondhand asset prices have plunged from the first half of 2011, especially in the large sized vessel
segments,  capesize  and  panamax,  with  the  BDI  triggering  further  falls  during  the  second  half  of  the
year.  According  to  the  Baltic  Exchange’s  Sale  and  Purchase  Assessments,  the  value  of  a  5yrs  old
capesize of 172,000dwt has dropped to about $33,4mil from $42,9 at the end of June 2011, while at end
of  June  2008  was  more  than  $153mil.  In  the  panamax  market,  the  value  of  a  5yrs  old  vessel  of
74,000dwt is now at near $23mil, from $30,8 at the end of June 2011, while at the end of June 2008 was
more than $88mil. In the supramax segment, the value of 5yrs old vessel of 52,000dwt is now in the
region of $22mil from $27,5mil at the end of June 2011, while at the end of June 2008 was at more than
$75mil.
The BDI closed at 1,157 points on Friday July 6th, up by 15% from last week’s closing and down by 20%
from a similar week closing in 2011, when it was 1,443 points. BCI, BPI and BSI has shown an upward
trend with the BHSI show some signs of mild softness.  
The highest rate increase has been in the capesize segment, BCI up 25.4% w-o-w, BPI up 15% w-o-w,
BSI up 3.1% w-o-w, BHSI down by 0.8% w-o-w. Capesize average time charter earnings showed an
increase  of  98%  from  last  week,  panamax  earnings  are  up  by  15%,  supramax  are  up  by  3.1%  and
handysize down by 1%.
Capesizes  are  currently  earning  $7,904/day,  an  increase  of  $3,916/day  from  a  week  ago,  while
panamaxes are earning $9,002/day, an increase of $1,167/day. At similar week in 2011, capesizes were
earning  $13,995/day,  while  panamaxes  were  earning  $13,471/day.  Supramaxes  are  trading  at
$13,556/day, up by $411day from last week’s closing, 72% and 51% higher than capesize and panamax
earnings respectively. At similar week in 2011, supramaxes were getting $13,443/day, hovering at 3.9%
lower levels than capesizes versus 72% today’s higher levels. Handysizes are trading at $ 10,309/day;
down $105/day from last week, when at similar week in 2011 were earning $10,422/day.
In the wet market, VLCC earnings persist to be below breakeven levels from limited AG activity and
oversupply of tonnage, while suezmax and aframax rates are weak as available tonnage was sufficient
to  absorb  increased  activity  in West  Africa.  The  crude  tanker  freight  market  remains  in  the  doldrums
from  faltering  U.S.  and  European  oil  demand,  while  vessel  earnings  are not  expected  to  surpass  the
break even levels during the second half of the year. In the VLCC market, rates from Arabian Gulf to
Japan for a 260,000dwt unit is now at WS42 with time charter equivalent earnings at $20,000/day, from
WS60  at  the  end  of  January  with  time  charter  equivalent  earnings  at  $35,500/day,  while  in  2008
earnings averaged at $96,900/day. In the suezmax market, rates for 135,000dwt unit in WAFR-USAC
route is now at WS62.5 with time charter equivalent earnings at $15,700/day, from WS 80 at the end of
January  with  time  charter  equivalent  earnings  at  $21,100/day,  while  in  2008  earnings  averaged  at
$60,200/day. In the aframax market, rates in North Sea-Continent are now at WS95 with time charter
equivalent earnings at $21,100/day, showing a mild decline from end of January, when rates were at
WS100, while in 2008 earnings averaged at $52,400/day.  
The falls of the crude freight rates have also added in the downward spiral of secondhand asset prices
with investors trying to exploit the price differentials and expand their fleet via modern secondhand units.
According to the Baltic Exchange’s Sale and Purchase Assessments, the value of a 5yrs old VLCC of
305,000dwt, is now at $57mil from about $82mil at the end of June 2011, while at the end of June 2008
was at $157 mil. The value a 5yrs old aframax unit of 105,000dwt is now at about $30mil, from $38,9mil
at  the  end  of  June  2011,  when  at  the  end  of  June  2008  was  more  than  $74mil.  In  the  MR  product
segment, the downward revision of asset prices is softer than large sized vessel categories, the same
with supramax dry bulk carriers. The value of a 5yrs unit of 45,000dwt is now about $22,5mil, from $29
mil at the end of June 2011, while at the end of June 2008 was in the region of $53mil.
VLCC spot market suffers as oil buyers are waiting for the crude price to fall further before resuming
their  consumption.  During  the  first  days  of  July,  the  brent  crude  spot  price  has  moved  near  to
$100/barrel, from the low record level of $83,23/barrel on June 21
st
, with IFO 380 fuel cost surpassing
the level of $600/barrel in Fujairah this week. However, there is still a downward pressure on the price of
oil due to the worldwide economic recession.
The Bank of America Merrill Lynch forecasts a price of $106/bbl for Brent crude and $97/bbl for US WTI
crude oil in 2H 2012, while contraction in OECD Europe demand for crude oil on account of Europe debt
crisis and excess supplies of crude oil, create downside risks on the oil demand. BofAML also said that
the risk of $60/bbl for Brent crude won’t go away soon due to the latest developments in Eurozone debt
crisis and its impact on emerging economies.  “Our oil price forecasts for 2H2012 incorporate a number
of assumptions including (1) a more aggressive monetary and fiscal stance in emerging economies, (2)
another round of quantitative easing by the Federal Reserve in September, and (3) reduced supplies
from the Iranian oil embargo kicking in on July 1. But most crucially, without some degree of banking
integration  and  ECB  easing,  the  downside  risks  to  oil  prices  in  2H2012  will  grow,”  BofAML  said  in  a
note.
In the gas market, Japanese LNG trade growth remains supportive for the increased LNG contracting
activity. Japanese gas utilities are considering expanding their participation in upstream developments
for LNG as part of efforts to lower cost of importing the product, the Japan Gas Association Chairman
Mitsunori Torihara told reporters. Speaking at a Tokyo press conference, Torihara said that the utilities
were  also  diversifying  their  sources  of  LNG,  extending  from  conventional  gas-based  LNG  to
unconventional  gas  sources  such  as  coalbed  methane  and  shale-gas  based  LNG.  Japan  expects  to
import 15 million tonnes of liquefied natural gas (LNG) from North America per year from as early as
2016 once the United States lifts restrictions on exports to the world's biggest LNG buyer.
In the container market, the momentum remains positive from an improvement in freight rates during
the second quarter of the year, while there are still concerns on the overcapacity with hopes from an
increased demolition activity in the period January-May. The newbuilding activity remains low from the
previous  high  volumes  of  2011  and  2010,  while  the  low  newbuilding  prices  still  tempt  owners  for  the
placement of new boxships in the post panamax segment.
The week ended with a rise in the Shanghai Container Freight with a remarkable rise in the main trade
from Shanghai to base ports of Europe and in the secondary trading route from Shanghai to Australia
(Melbourne). The Shanghai Container Freight Index ended on Friday 29th June at 1460, up by 2% from
previous week’s closing at 1425, while is up by 54% from the end of December 2011, when it was at
948. July European General Rate Increases have added in the improvement of the index and could lead
to further increase in the coming weeks and August.
On a weekly basis, rates on Asia-Europe and Asia-Mediterranean routes have shown an increase by
22%  and  12%  respectively  by  rising  to $1888/TEU  and  $1892/TEU  respectively,  from  $1549/TEU  on
Asia – Europe and $1685/TEU on Asia-Mediterranean. Rates on the Asia-Europe route are now 166%
higher than this year’s lowest level on February 17th, when they were at $711/TEU and 3% down from
this year’s peak of $1934/TEU on May 4th. The same outstanding increases have been also noted in the
rates  of  Asia-Mediterranean  by  recording  a  158%  upward  movement  from  this  year’s  bottom  low  of
$735/TEU on February 17th and 7% down from this year’s peak of $2033/TEU on May 4th.
In transpacific routes, Asia-USWC and Asia-USEC, spot rates plus surcharges have posed softness, but
they are still firm by standing 26% and 17% respectively above from the end of the first quarter. On a
weekly basis, rates on Asia-USWC are now at $2571/FEU, 4% down from $2678/FEU on Friday 22ND
June,  while  rates  on  Asia-USEC  are  at  $3752/FEU,  down  by  1%  from $2678/FEU.  On December 9th
2011, rates on Asia-USWC route were 45% lower than today’s levels by standing at $1419/FEU and on
Asia-USEC were at $2524/FEU, down by 29%.
The positive sentiment of the container freight market is under uncertainty on the long term, as container
trade  still  suffers  from  European  economy.  According  to  an  independent  container  sector  research
house Global Port Tracker, all signs point towards another recession in Europe, which will drag down
the container trade on the Continent. Global Port Tracker estimates that European imports will grow by
only 1.5% over the course of this year, less than a third of the 2011 growth rate. Export growth will also
fall by two thirds, reaching 3%.  
In the shipbuilding industry, South Korea faces a slump of ordering activity from the headwinds in the
shipping market and global economy. According to the Ministry of Knowledge Economy, orders won by
major South Korean shibuilders halved in the first six months of 2012 from a year ago, by posting their
first annual  drop  in  19years, due  to  the  sluggish market in  the midst of  the  European  financial  crisis.
According to government data, South Korea’s vessel exports totalled $25,5bn in the first half of the year,
down 20.1% from a year ago. The country's three biggest shipbuilders - Hyundai Heavy Industries Co.,
Daewoo Shipbuilding & Marine Engineering Co. and Samsung Heavy Industries Co. - clinched orders
worth  a  combined  US$17.3  billion  during  the  January-June  period,  down  50.8  percent  from  a  year
earlier.
In China, the severe slowdown of global shipbuilding industry has led to bankruptcy one more yard. A
small  private  yard,  Zhejiang  Jingang  Shipbuilding,  based  in  Taizhou,  Zhejiang  province,  filed  for
bankruptcy as it laden with debts of some RMB300m ($47,1m). Among the approximately 100 private
shipbuilders  in  Taizhou,  about  80%  of  them  are  inactive  or  are  only  operating  at  half  the  capacity.
“During the first-half of this year newbuilding orders are only about 10% compared to orders seen in the
past  years,”  Chen  Cunyu,  chairman  of  Taizhou  Ships  Industrial  Association  and  director  of Wenzhou
Hexing  Shipyard,  told  reporters.  Government  officials  of  Taizhou  also  conceded  that  most  of  the
shipyards  are  presently  surviving  on  existing  orders.  But without  fresh  contracts  coming  in  to  sustain
their businesses, there could be more cases of bankruptcy in the second-half of this year, the officials
warned.  The  downturn  is  taking  a  heavy  toll  on  small  to  mid-sized  yards  across  China’s  major
shipbuilding centres. In Nantong yards such as Nantong Huigang Shipbuilding and Nantong Qiya Ship
Engineering  have  declared  bankruptcy,  In  Zhejiang  Mingxing  Enterprise  has  filed  for  bankruptcy  and
Dongfang Shipbuilding is struggling for survival under a mountain of debt. In Zhoushan, Heng Fu and
Lan Tian Shipbuilding Group have both declared bankruptcy.
In  the  shipping  finance,  the  Export-Import  Bank  of  Korea  has  decided  to  increase  its  lending  to
shipyards and shipping lines by more than Won1trn ($880.1m), as part of its efforts to rescue the South
Korean  shipping  industry  amid  the  current  downturn.  Korea  Eximbank  will  provide  funds  totalling
Won16trn  for shipping  finance  this  year,  compared  to  the earlier  planned Won14.6trn,  the  bank  said.
The bank was originally planning to provide Won3.3trn of direct loans and Won11.3trn of guarantees,
but  later  decided  to  increase  its  lending  due  to  strong  demand,  a  bank  official  told  Lloyd’s  List.  “Our
bank’s loans have almost reached the planned amount although there are still quite some guarantees
available. Therefore, the incremental amount will be for loans,” he added.
In terms of ship financing deals, Nanjing Tanker Corporation has placed two of its tankers as collateral
to borrow RMB400m ($63m) from CMB Financial Leasing, the company said in a regulatory filing. The
deal, involving panamax tanker Yong Xing Zhou and MR tanker Chang Hang Tan Suo, was agreed in
the form of a leaseback with the financial institution over an eight-year period. Shanghai-listed Nanjing
Tanker  explained  that  the  loan  will  support  daily  working  capital  and  give  flexibility  to  debt  structure,
enhancing  the  company's  short-term  repayment  capability.  In  addition,  marine  fuels  supplier  Brightoil
Petroleum has penned a three-year term loan facility with China Development Bank to borrow $50m.
The facility, bearing interest, is repayable in full on the date falling 36 months after the first utilisation
date of the facility agreement. In addition, Japanese owner K Line is planning to raise $735mil for fleet
expansion. The company said it is taking out a JPY 30bn ($376.78m) loan over 60 years and selling
JPY  28.61bn  of  shares  to  give  it  a  “solid  financial  foundation”  after  last  year’s  loss  of  JPY  41.35bn.
Lenders include Mizuho Corporate Bank, Development Bank of Japan and Sumitomo Mitsui Trust Bank.

Golden Destiny Research Department