Liquid cargo includes crude oil, refined oil products, liquefied gases, chemicals and associated products, all of which are shipped in tankers dedicated to the specific commodity.
The following graph depicts the growth of world seaborne trade, by type of cargo, from 1990 to 2006.
In 2006, approximately 8.3 billion tons of cargo of all types was transported by sea, compared with 6.3 billion tons in 2001. Over this period the average compounded annual growth rate (CAGR) in seaborne trade was 5.7%, which was more than double the average recorded in the 1990s.The increases witnessed in seaborne trade in most commodities in the last five years have been stimulated by rapidly expanding economies in Asia, especially China and India. Rising demand for raw materials and semifinished products by these countries has provided a positive stimulus to shipping, after what was for most a period of fairly flat trading. The combination of rising vessel demand and modest increases in supply have also led to much firmer freight markets and higher freight rates, with the dry bulk carrier sector being no exception.
In 2006, dry cargo accounted for 4.5 billion tons, equivalent to approximately 54.0% of all seaborne trade, with liquid cargo making up the balance. During the period between 2001 and 2006, world seaborne dry cargo trades increased by a CAGR of 7.1%, in part because of the strength in demand for basic raw materials.
The following table presents the change in global seaborne trade by type of cargo between 2001 and 2006.
Dry Bulk Trade
Dry bulk cargo can be further defined as either major bulk cargo or minor bulk cargo, all of which is shipped in bulk carriers. Major bulk cargo includes, among other things, iron ore, coal and grain. Minor bulk cargo includes agricultural products, mineral cargo (including metal concentrates), cement, forest products and metal products. During the 1980s and 1990s the average annual increase in dry bulk trade was slightly more than 2.5% per annum. However, between 2001 and 2006, seaborne dry bulk trade increased from 2.1 to 2.8 billion tons, equivalent to a CAGR of 5.3%, thereby creating significant additional demand for bulk carrier shipping.
The following chart illustrates the changes in seaborne trade between the major and minor bulks in the period 2001 to 2006.
The major bulks—iron ore, coal and grain (comprising wheat, coarse grains and soybeans accounted for an estimated 61.0% of total dry bulk seaborne trade in 2006. Of these three main commodities, iron ore and coal have been growing the fastest, with CAGR’s of 9.8% and 4.1% respectively in the period 2001-2006.
The following graph depicts the growth in seaborne trade of iron ore, coal and grains in the period 2001 to 2006.
Iron Ore
Iron ore is used as a raw material for the production of steel, along with limestone and coking (or metallurgical) coal. In 2006, approximately 723 million tons of iron ore were exported worldwide, with the main importers being China, the European Union, Japan and South Korea. The main producers and exporters of iron ore are Australia and Brazil.
The following table provides a summary of iron ore imports by major importing countries/economic regions for the period between 2001 and 2006.
Australia and Brazil together account for approximately two thirds of global iron ore exports. Although both have seen strong demand from China, Australia continues to benefit the most, accounting for 30.0% of every extra ton of iron ore imported by China in 2005 over 2004, compared to a corresponding figure of 20.0% for Brazil. However, although Brazilian exports to China have grown more slowly, the contribution to ton-mile demand has been greater due to the longer distances between origin and destination. India is also becoming a major exporter of iron ore. Unlike Australia and Brazil, which tend to export primarily in the larger Capesize vessels, much of India’s exports are in smaller Panamax and Handymax vessels.Coal is an abundant commodity. At current production rates, coal reserves would provide approximately 200 years of supply, compared with 41 years for oil and 67 years for natural gas. In addition, coal is mined in more than 50 countries, with no world dependence on any one region. Coal is divided into two categories: thermal (or steam) coal and coking (or metallurgical) coal. Thermal coal is used mainly for power generation. Coking coal is used to produce coke to feed blast furnaces in the production of steel. The following table provides a summary of coking coal imports by major importing countries/economic regions for the period between 2001 and 2006.
Expansion in air-conditioned office and factory space, along with industrial use, has raised demand for electricity, of which nearly half is generated from coal-fired plants, thus increasing demand for thermal coal. Furthermore, the high cost of oil and gas has lead to increasing development of coal fired electricity plants across the world, especially in Asia.
Asia’s rapid industrial development has also contributed to strong demand for coal, which accounted for roughly a third of the total growth of seaborne dry bulk trade between 2000 and 2006. Metallurgical coal accounted for 8.0% of seaborne trade in 2006.
GrainGrains include wheat, coarse grains (corn, barley, oats, rye and sorghum), and oil seeds extracted from different crops such as soybeans and cottonseeds. In general, wheat is used for human consumption, while coarse grains are used as feed for livestock.
International trade in grains is dominated by four key exporting regions: North America, South America, Oceania and Europe (including the Former Soviet Union). These regions collectively account for over 90.0% of global exports. Large importers are typically Asia, North Africa(Egypt), the Middle East and, more recently, India.
Historically, certain economies have acted as the “primary driver” of dry bulk trade. In the 1990s Japan was the driving force, when buoyant Japanese industrial production stimulated demand for imported bulk commodities. More recently, China and India have been the main drivers behind the recent increase in seaborne dry bulk trade.
Globally, Chinese steel production and consumption was the crucial driver of the recent dry bulk boom, fully supported by the iron ore trades.
The following table provides a summary of crude steel production by major producing country/economic region for the period between 2001 and 2006.
From approximately 220 million tons of crude steel output in 2003, Chinese production increased significantly to about 270 million tons in 2004 (an increase of 22.7%) and to about 350 million tons in 2005 (an increase of 29.6%). In 2006, production is estimated to have increased by a further 20.0%, taking total output to approximately 422 million tons. Almost single handed, this factor was responsible for fuelling the dry markets boom. Over the last five years, steel production in China has grown at an average annual rate of approximately 23.0%, compared to global production which has increased by an average 6.4% per annum. As a result of the growth in steel production, Chinese imports of iron ore have also increased substantially.
The following chart illustrates the growth of Chinese iron ore imports by source.
Chinese iron ore imports for 2006 are placed at 327 million tons, an increase of 18.0% over 2005 imports of 275 million tons and have increased at a CAGR of 23.0% since 2001. Chinese imports of iron ore have traditionally come from Australia, Brazil, India, South Africa and Peru. Since 2000, the share of Australian and South African ore has declined, with India and Brazil providing an increased share. This shift in origins is borne out by the more rapidly increasing ton miles for iron ore compared to the overall dry bulk market, something which has benefited the larger ships in the bulk carrier fleet. The larger ships today are limited to Capesize vessels. But recently some single hull VLCCs are being converted to carry ore. These ships are called Very Large Ore Carriers (“VLOC”). The demand for these ships comes from the ore trade mainly between Brazil and China. These vessels bring huge economies of scale as they can carry between 230,000 dwt to 270,000 dwt of iron-ore at a time. While Cape size ships’ charter rates have increased significantly, it makes sense for Chinese ore importers to bring their cargo in bigger vessels.
We believe that VLOCs are to be the preferred vessels for this growing demand for transporting ore from Brazil to China since they can carry 100,000 dwt or more cargo than a Cape size vessel in the same amount of time.
In recent years, China has become a net importer of coal, in contrast to its position as recently as 2003 as the world’s second largest exporter of coal. The surge in Chinese import demand has resulted in a combination of increased demand, as utilities are building more power plants, and reduced supply, as older inefficient mines are closed down. The Chinese government has also placed restrictions on the export of coal.
India
India is emerging as major force in the dry bulk shipping markets. A combination of buoyant economy and a rapidly expanding industrial base have stimulated foreign trade in bulk commodities, both in terms of imports and exports. In turn, this has created demand for shipping services which is increasingly being met by a fast growing maritime sector within India.
Iron Ore
India’s iron ore industry is developing quickly. Production has risen from 67 million tons in 1996 to 120 million tons in 2006 and there has also been a corresponding uplift in export volumes.
The following table provides a summary of iron are production, imports and exports in India between 1996 and 2006.
India is already the second largest exporter of iron ore behind China and is now running ahead of traditional suppliers such as Brazil. Historically, Japan was the major consumer of Indian iron ore, but it has since been replaced by China.An overview of India’s major trade partners for iron ore exports is provided below.
Coal
Coal is a major commodity in the Indian economy. It accounts for more than one-third of primary energy consumption, while over 54.0% of domestic power generation is now from coal-fired power plants.
The following graph depicts Indian coal production and consumption for the period 1991-2006.
The following table provides a summary of Indian coal consumption, by consuming sector, for the selected periods between 1970 and 2007.
The following table sets out the installed and projected capacity for power generation in India.
Indian domestic coal is not considered to be of good quality because of the presence of inorganic impurities. For example, the ash content in Indian coal is more than 40.0%. Moreover, Indian coal has low sulphur content, generally less than 0.6%, and the chlorine content is 0.1%, all additional reasons for greater reliance on increasing coal imports. The following graph shows the projected growth of power generation capacity in India.
The Ministry of Power has set a goal, Mission 2012: Power for All, with the objective of ensuring sufficient power to achieve an economic growth rate of 8.0%. In order to meet its goals, the Government of India has envisaged a capacity addition to power generation of 100,000 MW by 2012. The major contribution in this expansion drive is expected to come from Ultra Mega Power Projects (“UMPP”). These are high capacity power projects of 4000MW each. Out of nine UMPP, four projects are at coal pit heads, based on indigenous coal and the remaining five have been identified at coastal locations, which are liable to be based on imported coal.The following table provides a summary of coal-fired power projects in India with coal import potential.
Indian coal imports were just short of 40 million tons in 2005-2006 and have more than doubled in the last decade. The CAGR for coal imports since the late 1990s is now running close to 12.0% and, given the projections of Indian energy consumption, look set to rise further.
The following table provides a summary of Indian coal imports, by coal type, between 1998 and 2006.
Imported thermal coal is preferred by the power sector due to its high calorific value and low ash content as compared to domestic coal. An increasing number of power stations in India are now bringing about technological upgrading in the plants to blend imported coal, which is more efficient than domestic coal. The key exporters of thermal coal to India are shown below.
Currently the coal handling capacity at major Indian ports is only 46 million tons. In addition, there is further coal handling capacity at minor ports which is estimated to be approximately 15 million tons. Given that power generation capacity in India is set to rise significantly, imports of coal will also have to rise. As such, there is insufficient port infrastructure to handle the imports of coal in the coming years and port facilities will need to be enhanced in terms of handling bigger vessels, ensuring better cargo handling facilities, better cargo storage facilities in addition to allocating more dedicated berths for coal.
Steel
India’s rapid economic growth is being built on a frame of steel. Soaring demand by sectors such as infrastructure, real estate and automobiles, at home and abroad, has put India’s steel industry on the world map. According to data provided by IISI, India is now the seventh largest producer in the world with an overall production of approximately 43 million tons in 2006, as compared to its production of 22 million tons in 1996. Over the past ten years India’s steel output has grown nearly 7.0% per year, while global crude steel output has increased by 5.0%.
The following charts show global steel production, by country/economic regions, in 1996 and 2006.
Even though India is now one of the world’s top ten steelmakers, its domestic output is insufficient to meet the demand in all segments. In 2005, 4.7 million tons of steel were imported, compared with only 2.2 million tons ten years earlier. There are several reasons for this: firstly, steel consumption is rising fast as a consequence of the upsurge in economic growth and secondly, there is demand for high quality products, which India cannot supply in sufficient quantities for the foreseeable future.
At the moment coal is also the major source of energy used in the manufacture of cement, either independently or indirectly, through use in electricity generation. Most of the coal used by Indian cement companies is indigenous, procured through Coal India Ltd, and Singareni Collieries Co. Ltd. Most of the companies in the cement industry receive coal on the basis of long-term contracts with different suppliers and the contract is generally referred to as linkage.
Dry Bulk Carrier Demand
Demand in the dry bulk sector is normally expressed in terms of ton miles. Ton mile demand is calculated by multiplying the volume of cargo moved on each route by the distance of the voyage. The following chart details the changes in ton-mile demand for major and minor bulks in the period 1990 to 2006.
As can been seen from the chart above, the increases in ton mile demand in the 1990s were comparatively modest and reflected the small underlying changes in trade. However, since 2001, ton mile demand has grown strongly, as a result of the steep increase in bulk trades, brought about by the growing prominence of China and India in the dry bulk sector. In fact, between 2001 and 2006, overall ton mile demand in the dry bulk sector increased from 9.7 trillion ton miles to 13.6 trillion ton miles, a 39.3% rate of growth overall and a CAGR of 6.9%. Hence, from 2001, demand for bulk carriers has been rising steadily.
This is, however, above the long term growth rate in ton mile demand in the dry bulk sector and reflects the rise in long haul movements, especially for commodities such as iron ore. Total ton mile demand in the major bulks increased from 6.4 trillion ton miles in 2001 to 9.4 trillion ton miles in 2006, equivalent to CAGR of 7.7%. In ton mile terms, the impact of longer voyages in the iron ore trades is shown by the growth during the period from 2.6 trillion ton miles to 4.3 trillion ton miles, equivalent to a CAGR of 10.5%.
The following table provides a summary of dry bulk carrier demand by commodity for the period 2001 to 2006(1).
Generally speaking, the larger ship sizes—Capes and Panamaxes—have seen higher growth rates in ton mile demand than Handymax and handy tonnage, due to the higher growth rates seen in iron ore and coal, the principal cargoes for larger bulk carriers.
The following table provides a summary of dry bulk carrier demand by ship type for the period 2001 to 2006(1).
Demand for the Panamax and Kamsarmax vessels has grown along with the overall market growth, and has also gained on spill-over from the Capesize sector, including where a larger cargo is “split” into two bottoms. Principal demand drivers have been the iron ore, coal, and grain trades. Drewry estimates that demand for Panamax vessels has grown from 2.4 trillion ton miles (66.7 million dwt) in 2002 to 3.3 trillion ton miles (91.5 million dwt) in 2006.The following map represents the major global dry bulk trade routes.
Whilst the above represents the main dry bulk trade routes in 2007, it is important to remember that seaborne trade evolves over time. For example, until quite recently China, was a major exporter of coal, but this is now changing and Chinese imports of coal are on the increase. New routes and new trading opportunities are thus a permanent feature of the market.
Dry bulk carriers are one of the most versatile elements of the global shipping fleet in terms of employment alternatives. They seldom operate on round trip voyages and the norm is often triangular or multi-leg voyages. Hence, trade distances assume greater importance in the demand equation and increases in long haul shipments will have greater impact on overall vessel demand.
Demand for dry bulk carrier capacity is also affected by the operating efficiency of the global fleet. In recent years, the growth in trade has led to port congestion, with ships at times being forced to wait outside port to either load or discharge due to limited supply of berths at major ports. This inefficiency has been a further factor contributing to the general tightness in the market.
source: Mercator IPO Prospectus
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