August 18, 2009 | Shipping

Bharat Chhoda
Freight Forward: Shipping sector update bharat.chhoda@icicisecurities.com
• The Baltic Dry Index was down 11% MoM, mainly on account Prerna Jhunjhunwala
of a fall in demand for commodities worldwide prerna.jhunjhunwala@icicisecurities.com
Rahul Malhotra
rahul.malhotra@icicisecurities.com
• Freight rates for Capesizes remained lower than the previous
month, while other segments noticed firmer day rates

• Day rates in the tankers segment across all vessel categories Vessel wise Comparative Freight Rates per day
fell in July, with VLCC rates declining by more than 70%
Change (%)
• The Newbuilding scenario continues to be quiet. However, Asset Class Current 3M 6M 1Yr.
with yards reassessing their prices, some build up in interest VLCC/ULCC# 5,128 -55 -88 -96
from potential buyers is visible in specific segments SUEZMAX# 2,629 -77 -91 -97
AFRAMAX# 3,910 -46 -78 -91
Capesize* 5,628 155 217 -57
• Despite low rates, there is surprisingly little scrapping of
Panamax* 3,194 127 479 -63
tanker tonnage. Scrapping may increase with the low rates
Supramax* 1,936 50 354 -64
likely to continue in the near future
* Index
# Rate (USD)
• Chinese buyers have been active and bought numerous Source: Industry, ICICIdirect.com Research
panamaxes and supramaxes

Outlook

Tankers Freight Rates

Tanker rates have been soft in July after a reasonable first quarter. July, 09
Declining use of tankers for storing oil at sea has released VLCCs for
active trading. This has increased the supply, thereby depressing the
markets. Further, large quantities of tonnage addition over the next
two years are pressurising freight rates downwards. Any sustainable VLGC
upturn in the tanker market is unlikely unless Opec decides to raise
its output again. LGC

Dry bulk MGC

After rising by 64% in June, the Baltic Dry Index took a breather and
declined by 11% (MoM) in July 2009. The dry bulk market has been VLCC
increasing over the last few months. This rise was mainly on account
of an increase in imports of iron ore and coal by China. The Aframax
combination of high raw material imports to China and less than
expected growth in the fleet has lead to the firm trend in the freight Suezmax
rates. However, on account of iron ore stockpiles being at peak
levels, we expect China’s imports of raw materials to slow down, in Clean
turn, leading to weakness in the dry bulk market.
Capesize
LPG
Day rates in the LPG segment remained stable for VLGC and LGC, Panamax
while MGC saw a meagre decline of 3-6% in July. Though we expect
lower day rates for the next few months on account of weak market
Supramax
conditions, increasing tonnage supply, coupled with conversion of
few tankers into LPG carriers, the rates will stabilise in the long-term
on account of increase in scrapping activities.

1|Page
Freight rates movements

The Baltic Dry Index (BDI), a gauge of shipping costs for commodities,
declined by 11% in July. This was owing to a decline in China’s
procurement of iron, ore as Chinese buyers are cutting Australian imports
because of impasse over the ore contracts. BDI decreased from 3757 levels
in June 2009 to 3350 levels in July 2009. Capesize day rates saw a fall of
around 27%.

Exhibit 1: Tankers and bulkers one year T/C (US$ per day)

Asset class Apr, 09 May,09 Jun,09 Jul,09

VLCC 11,421 6,184 17427 5,128 The tanker segment was
Suezmax 11,566 9,147 11624 2,629 the worst affected in July,
Aframax 7,267 5,403 7202 3,910 with rates across all vessel
Capesize 22,337 39,066 71,154 56,800 categories declining by
Panamax 13,752 17,270 24,219 23,849 more than 45%. VLCC rates
Supramax 15,082 16,847 19,477 21,819 were down by 71% on an
Handysize 13,864 14,770 12,581 13,705 MoM basis
T/C- term charter

Source: Industry, ICICIdirect.com Research

Exhibit 2: LPG freight rates (US$)

June, 2009 July, 2009

Asset class Monthly Daily Monthly Daily
VLGC-TC 78,000 cbm 445,000 15,638 455,000 15,368 MGC witnessed a 3-8%
LGC-TC 57,000 cbm 615,000 20,230 610,000 20,230 decline in the day rate,
LGC-Tc 54,000 cbm 380,000 12,500 380,000 12,500 while VLGC and LGC day
MGC-TC 35,000 cbm 615,000 20,230 575,000 18,914 rates remained stable in
MGC-TC 30,000 cbm 605,000 19,901 560,000 18,421 July
MGC- TC 28,000 cbm 580,000 19,072 530,000 17,434
MGC- TC 24,000 cbm 550,000 18,072 525,000 17,270
12 month time charter rates

Source: Industry, ICICIdirect.com Research

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Exhibit 3: China’s monthly iron ore inventory (average) (million tonnes)

80
73
70 71
69
70 Continuous rise in
64 China’s iron ore
59
59 inventories levels
60 over the past five
months
50

40
Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09

Source: Industry, ICICIdirect.com Research

Exhibit 4: China’s monthly steel production (million tonnes)

75

60

45 Steel production
in China
30 increased by 2.96
MT (6.4%) in June
15

0
Feb-06

Jul-06

Dec-06

May-07

Oct-07

Mar-08

Aug-08

Jan-09

Jun-09

Source: Industry, ICICIdirect.com Research

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Exhibit 5: Coal Index

1400
1200
1000 Rise in both the
World and Asia
800 Pacific coal index
in July
600
400
200
0
Feb-06 Jul-06 Dec-06 May-07 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09
World coal index Asia pacific coal index
Source: Bloomberg, ICICIdirect.com Research

Exhibit 6: Asia pacific iron ore index

700
600
500
400
300
200
100
0
Mar-06

Jul-06

Nov-06

Mar-07

Jul-07

Nov-07

Mar-08

Jul-08

Nov-08

Mar-09

Jul-09

Source: Bloomberg, ICICIdirect.com Research

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Exhibit 7: Weekly Dry Bulk Indices Movement (August 1 2008-July 31 2009)

14000
There was a fall in
12000 Capesize day
rates, while
10000
smaller dry bulk
vessels like
8000
Panamax and
6000 Supramax
witnessed firmer
4000 day rates in July

2000

0
1st 29th 26th 24th 21st 19th 16th 13th 13th 9th 8th 5th 3rd 31st
Aug,08 Aug,08 Sep,08 Oct,08 Nov,08 Dec,08 Jan,09 Feb,09 Mar,09 Apr,09 May,09 Jun,09 Jul,09 Jul,09

Baltic Dry Index Baltic Capesize Index Baltic Panamax Index

Source: Bloomberg, ICICIdirect.com Research

Exhibit 8: Dry bulk indices

17300
14500
11700 BDI down by 11%
(MoM) to 3350 in
8900 July 2009
6100
3300
500
Feb-06 Jul-06 Dec-06 May-07 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09
Baltic dry index Baltic capesize index Baltic panamax index

Source: Bloomberg, ICICIdirect.com Research

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Exhibit 9: International crude oil prices (US$/bbl)

160 $ 133/bbl
140 48% decline from the peak
120
100
80
60
40 $68.6/bbl
20
0
Feb-06 Jul-06 Dec-06 May-07 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09

Crude oil

Source: Bloomberg, ICICIdirect.com Research

Exhibit 10: Baltic clean & dirty tanker index

2500

2000 The fall in the Baltic

dirty index by
1500 15.7% to 516.5 from
612.9 was on
1000 account of the fall
in crude oil prices in
500 July
0
Mar-06 Aug-06 Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09

Baltic clean tanker index Baltic dirty tanker index

Source: Bloomberg, ICICIdirect.com Research

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Exhibit 11: Tanker rates trend (US$/day)

152,500
127,500 VLCC day rates
102,500 saw a decline of
more than 70%,
77,500 with freight rates
52,500 falling from
US$17,247 in June
27,500 2009 to US$5,128
2,500 in July 2009
Apr-03

Sep-03

Feb-04

Jul-04

Dec-04

May-05

Oct-05

Mar-06

Aug-06

Jan-07

Jun-07

Nov-07

Apr-08

Sep-08

Feb-09

Jul-09
VLCC Suezmax Aframax

Source: Bloomberg, ICICIdirect.com Research

Exhibit 12: Offshore rig utilisation by rig type

100% 90.2% 86.7% 90.2%

85.0% 90.5%
83.2% 82.6%
80.2%
81.1% 78.5% 74.9%
80% 75.0%
Continuous
decline in Jack up
60% rig utilisation
levels in the last
four months
40% (74.9% in July
2009), clearly
signifies the fall
20% in demand for
rigs

0%
Apr-09 May-09 Jun-09 Jul-09
Drillship Jack up Semisub

Source: Rig zone, ICICIdirect.com Research

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 Exhibit 13: New vessel additions

Asset Class 2009 2010 2011 2012 2013 Total Order Book
Tankers High proportion of
VLCC/ULCC 28 71 88 13 0 200 tanker fleet,
SUEZMAX 39 44 57 9 1 150 expected to be
AFRAMAX 36 83 49 7 3 178 added in 2009 and
PANAMX 23 29 36 2 2 92 2010, will lead to
MR TANKERS 131 192 114 17 2 456 oversupply in the
0-35K DWT 153 183 62 13 1 412 current economic
Total(a) 410 602 406 61 9 1488 scenario and
Bulk pressurise the day
CAPESIZE 115 328 217 103 36 799 rates, going ahead
80-100k WT 49 192 187 62 23 513
PANAMAX 24 84 65 35 9 217
SUPRAMAX 222 363 245 73 7 910
HANDYMAX 212 301 249 103 9 874
Total(b) 622 1268 963 376 84 3313
Total Vessel(a+b) 1032 1870 1369 437 93 4801

Source: Industry, ICICIdirect.com Research

Exhibit 14: New building orders breakdown by vessel type (monthly)

Bulk carriers Container Tanker LPG/LNG All Others Total Units

New build orders
January, 2009 6 6 6 2 5 25
for dry bulk ships
February, 2009 8 0 46 0 36 90
saw a significant
March, 2009 14 1 31 0 17 63
rise (41%) in July
April, 2009 0 0 14 0 22 36
2009
May, 2009 3 0 6 0 8 17
June, 2009 37 0 6 0 7 50
July, 2009 52 10 12 0 5 79

Source: Industry, ICICIdirect.com Research

Exhibit 15: Vessel value (US$ Million)

Asset Class Current (USD Mn) 1 M Change (%) 3 M Change(%) 1Yr. Change(%) Newbuild vessel
Tankers Size DWT NB Contract 5Yr. NB Contract 5Yr. NB Contract 5Yr. NB Contract 5Yr. values (MoM) for
VLCC/ULCC 300,000 110.0 76.0 0.9 0.0 0.9 -1.3 -28.7 -52.2 VLCC/ULCC
SUEZMAX 150,000 71.5 60.0 -7.1 0.0 -5.9 0.0 -24.1 -40.3 remained flat, while
AFRAMAX 105,000 51.0 40.5 -3.8 -3.6 -15.7 -11.0 -32.0 -46.1 other tanker
PANAMX 70,000 45.2 37.0 -3.8 0.0 -13.1 -2.6 -37.7 -41.3 categories were
MR TANKERS 47,000 39.5 29.0 0.0 -3.3 -1.3 -9.4 -23.7 -45.0 lower by 4-7%
Bulk Size DWT
CAPESIZE 170,000 64.0 50.5 -1.5 1.0 12.3 11.2 -32.5 -66.9
PANAMAX 74,000 39.4 34.0 -2.7 3.0 9.4 21.4 -28.0 -61.1
SUPRAMAX 52,000 32.0 27.0 0.0 0.0 6.7 8.9 -32.1 -62.5

Source: Industry, ICICIdirect.com Research

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The asset values across all categories in the dry bulk segment decreased by
1.5-3% for NB contract. However, for five year old the same increased by a
meagre 1-3% on an MoM basis. In the tanker segment, the vessel values
either declined or were flat, in case of Suezmax, Aframax and Panamax.
Vessels values for MR tankers declined by more than 3% (five year old). In
July 79 new build orders were placed out of which 52 vessels were dry bulk
vessels.

Exhibit 16: BPR Asia Pacific Shipbuilding Index

1200 The BPR SHIP

index rose by
1000
1.4% in July 2009
800 to 344.68 against
340.04 in June
600
400
200
0
Jan-06

Apr-06

Jul-06

Oct-06

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Source: Bloomberg, ICICIdirect.com Research

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Exhibit 17: Global valuations

EPS (USD) P/E (x) EV/EBIDTA (x) ROE (%)

Company Country CY08 CY09E CY10E CY08 CY09E CY10E CY08 CY09E CY10E CY08 CY09E CY10E
Dry Bulk/Tankers
Teekay Corp.* USA 3.9 0.0 1.2 4.7 N.A 15.0 7.0 9.6 8.5 9.9 1.2 9.2
Diana Shipping* USA 3.0 1.6 1.5 4.5 8.4 9.0 4.5 7.3 7.5 27.4 13.1 10.6
Genco Shipping* USA 6.7 4.4 2.9 2.8 4.3 6.5 4.9 5.6 6.4 28.3 16.4 8.9
Dry Ships* USA 10.4 0.9 0.9 0.5 5.7 5.8 5.0 8.6 7.4 26.7 4.3 8.5
Frontline Ltd* Norway 8.0 1.2 1.2 2.6 17.8 28.6 4.5 9.4 8.6 100.3 14.8 12.3
G.E Shipping# India 1.9 0.8 1.3 2.3 5.2 3.3 3.5 5.9 4.2 27.1 10.2 14.1
Mercator Lines# India 0.3 0.3 0.3 2.9 3.3 3.6 4.2 5.2 6.0 16.7 14.7 11.8
LPG/LNG
BW Gas* Norway 0.4 0.0 0.3 2.3 - 3.7 - - - 11.1 - -
Daiichi*# Japan 1.4 -4.3 1.0 11.6 - 16.9 6.3 4.0 7.3 7.9 -23.8 8.5
Exmar* Belgium -0.8 0.3 0.7 - 45.3 18.9 11.2 10.8 7.6 3.0 9.5 12.5
Mitsui OSK Lines*# Japan 1.1 0.4 0.6 5.0 13.6 13.6 4.8 7.6 7.6 18.3 7.6 7.6
Varun Shipping# India 0.2 0.2 0.2 6.4 5.5 4.8 7.5 7.0 7.2 13.5 14.2 14.7
Offshore
Tidewater*# USA 7.4 6.0 6.0 5.8 7.1 7.1 4.3 4.9 4.6 15.3 13.7 13.7
Gulfmark* USA 6.1 5.0 4.5 4.8 6.9 8.6 5.0 5.2 4.6 18.5 16.6 13.0
SIEM Offshore* Norway 0.2 0.2 0.3 6.4 9.7 5.4 9.0 6.5 4.2 10.7 11.4 13.0
Diamond Offshore* USA 9.9 10.2 9.8 9.7 8.9 9.3 4.7 4.5 4.7 44.0 38.9 33.9
Aban Offshore# India 2.8 3.5 2.6 4.7 3.8 5.1 8.7 6.7 7.4 36.7 32.0 20.6
Great Offshore# India 1.5 1.0 1.5 5.7 8.3 5.6 5.4 5.9 4.2 29.3 17.3 21.0
Garware Offshore# India 0.4 0.6 0.6 7.1 4.5 4.0 8.9 6.5 5.6 19.6 24.6 22.3
Shipbuilding
Guangzhou Shipyard* China 0.3 0.2 0.2 6.0 6.8 7.3 6.8 7.6 7.3 34.4 25.0 19.2
Keppel Corp. Ltd.* Singapore 0.4 0.5 0.4 9.8 9.0 11.8 9.3 8.7 9.9 19.1 23.3 15.3
Yangzijiang Shipbuilding * China 0.1 0.1 0.1 7.9 7.4 8.2 3.6 3.2 3.4 33.1 34.4 23.8
Sembcorp* Singapore 0.1 0.2 0.2 11.6 10.3 11.0 6.3 5.3 5.6 25.6 33.5 27.0
Cosco Corp* Singapore 0.1 0.1 0.1 7.5 12.4 11.4 3.2 4.5 4.1 29.3 14.8 13.8
ABG Shipyard# India 0.7 0.7 0.8 4.4 4.3 3.8 5.7 4.8 4.3 19.3 13.7 13.8
Bharati Shipyard# India 1.0 1.1 1.3 2.7 2.4 2.0 3.2 3.2 2.6 18.8 17.6 18.0
*consensus
# FY
Source: Company, Bloomberg, ICICIdirect.com Research

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Company News Impact

Great Eastern Shipping entered into an agreement with the shipyard to

cancel one of the new building Kamsarmax bulk carrier scheduled for
delivery in Q1FY12. Currently, the company has a fleet size of 37 vessel
including 12 crude carriers, 18 product carriers, one gas carrier and six dry
bulk carriers.

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Glossary

Tankers

VLCC Very large crude carrier tanker of 200,000+ DWT

Suezmax A vessel of 120,000 to 200,000 DWT, whose dimension enables her to pass though the
Suez Canal

Aframax A tanker measuring between 80,000 and 120,000 in DWT terms primarily used for the
carriage of crude oil

Small Tankers A vessel of 10,000-60,000 DWT

Bulkers

Capesize Dry bulk carrier of 80,000-200,000 DWT

Panamax A vessel of 60,000 to 100,000 DWT, whose dimension enables her to pass through the
Panama Canal

Handymax Bulk carrier vessel of 40,000-60,000 DWT

Handysize Bulk carrier vessel of 10,000-40,000 DWT

Offshore

AHTSV Anchor handling tag supply vessel, a vessel specially designed to handle offshore oil
& gas platforms and rigs.

PSV Platform supply vessel, a vessel specially designed for proving support services, and to
ship/handle pipes, cement. Tools and provisions to offshore oil & gas platforms and
drilling rigs.

Drill ship A maritime vessel that has been fitted with drilling apparatus and is able to drill in water
depths of over 2000 meters.

Jack up rig Mobile offshore oil and gas drilling platform that is able to stand still on the sea floor,
resting on a number of sporting legs. Jack up rigs can only be placed in shallow water (Up
to1000 feet).

LPG

VLGC Very large gas carrier of 70,000+ CBM

MGC Medium gas carrier with a capacity of 20,000-50,000 CBM

LGC Large gas carrier of 50,000-70,000 CBM

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RATING RATIONALE

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and the notional target price is defined as the analysts' valuation for a stock.

Pankaj Pandey Head - Research pankaj.pandey@icicisecurities.com

ICICIdirect.com Research Desk,

ICICI Securities Limited,
7th Floor, Akruti Centre Point,
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research@icicidirect.com

ANALYST CERTIFICATION
We /I, Bharat Chhoda M Com, MBA (Finance), Prerna Jhunjhunwala, MBA (Finance), Rahul Malhotra MBA (Finance), research analyst and the author of this report, hereby certify that all of
the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation
was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an
associated person of ICICI Securities Inc.

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