Shipping( Bulks Carriers) - Freight Forward Agreements

Shipowners and charterers are confronted by a whole series of operational and commercial risks, a major one being the volatility of the freight market. In the last decade, a number of financial instruments have emerged as a way to manage this risk in both the dry bulk and tanker sectors. Such instruments consist primarily of Forward Freight Agreements (“FFAs,” traded “over the counter,” or OTC), a variant on a commodity swaps.

In its simplest form, the FFA is struck directly between the counterparties (usually with the intermediation of a broker) under a variety of contractual arrangements. The numeraire for dry bulk trading is nearly always one of several dozen daily route assessments disseminated by The Baltic Exchange, in London (based on an audited procedure where intermediaries provide pooled input on daily levels of specific voyages in dry bulk sectors), or a composite of individual route assessments.

In the simplest form, an “exchange of differences” around a swap price, around a specific $/ton or $/day on a Baltic route, is agreed between the parties. In more structured versions, a fixed rate is ‘swapped’ for a variable rate set by the market, under a specially modified ISDA swap contract. Options contracts on relevant route and sector indices are also brokered OTC, on a limited basis.

Though FFA’s began trading in the early 1990’s, the dry market has increased in activity since 2003, with the present phase of the strengthened charter market. Additional participants have joined the market, including a contingent of financial institutions. Financial settlement of FFA’s has usually been handled directly between the counterparties, however settlement of a portion of the market’s activity has been “cleared,” through a network of “Members” and/ or “Clearing Brokers,” who have accounts with one of several “Clearing Houses.”

Shipping(Bulk Carriers) - Types of Charters

Dry bulk carriers are employed in the market through a number of different chartering options. The general terms typically found in these types of contracts are described below.
• A bareboat charter involves the use of a vessel usually over longer periods of time ranging up to several years. All voyage related costs, including vessel fuel, or bunker, and port dues as well as all vessel operating expenses, such as day-to-day operations, maintenance, crewing and insurance, transfer to the charterer’s account. The owner of the vessel receives monthly charter hire payments on a per day basis and is responsible only for the payment of capital costs related to the vessel.
• A time charter involves the use of the vessel, either for a number of months or years or for a trip between specific delivery and redelivery positions, known as a trip charter. The charterer pays all voyage related costs. The owner of the vessel receives semi-monthly charter hire payments on a per day basis and is responsible for the payment of all vessel operating expenses and capital costs of the vessel. In some cases, long term time charters may come with an option to acquire the vessel at the end of the charter.
• A single or spot voyage charter involves the carriage of a specific amount and type of cargo on a load-port to discharge-port basis, subject to various cargo handling terms. Most of these charters are of a single or spot voyage nature, as trading patterns do not encourage round voyage trading. The owner of the vessel receives one payment derived by multiplying the tons of cargo loaded on board by the agreed upon freight rate expressed on a per cargo ton basis. The owner is responsible for the payment of all expenses including voyage, operating and capital costs of the vessel.
• A contract of affreightment, or COA, relates to the carriage of multiple cargoes over the same route and enables the COA holder to nominate different ships to perform individual voyages. Essentially, it constitutes a number of voyage charters to carry a specified amount of cargo during the term of the COA, which usually spans a number of years. All of the ship’s operating, voyage and capital costs are borne by the ship owner. The freight rate normally is agreed on a per cargo ton basis. Much of the dry bulk cargo that is transported by sea is moved under COA’s and these COA’s provide a more stable and secure income stream for bulk carrier owners.

Shipping ( Bulk Carrier) - Vessel Scrapping

All commercial vessels have a finite life and the average age at which dry bulk carriers have been scrapped over the last five years is 26 years.

Vessel owners often conclude that it is more economical to scrap a vessel that has exhausted its useful life than to upgrade the vessel to maintain it “in-class.” A vessel is deemed to be “in class” if the surveyors of a classification society determine that the vessel conforms to the standards and rules of that classification society. Scrapping is nonetheless also a function of the strength of the freight market and during periods of high freight rates such as 2004 and 2005, scrapping levels in the dry bulk sector were low by historical standards.

The following table provides a summary of dry bulk carrier scrapping, by vessel type, for the period 2001 to 2006.

Shipping (Bulk Carrier) - Vessel Types and Their Age Profiles

The bulk carrier was first developed to carry dry cargoes, which are shipped in large quantities and do not need to be carried in packaged form. The advantage of carrying such cargoes in bulk is that packaging costs can be greatly reduced and loading and unloading operations can be speeded up. The global dry bulk carrier fleet is divided into four categories based on a vessel’s carrying capacity. These categories are:

Capesize
Capesize vessels have carrying capacities of more than 100,000 dwt. These vessels generally operate along long haul iron ore and coal trade routes. Only the largest ports around the world possess the infrastructure to accommodate vessels of this size.

Panamax
Panamax vessels have a carrying capacity of between 60,000 and 100,000 dwt. These vessels are designed to meet the physical restrictions of the Panama Canal locks (hence their name “Panamax”—the largest vessels able to transit the Canal), making them more versatile than larger vessels. These vessels carry coal, grains, and, to a lesser extent, minerals such as bauxite/alumina and phosphate rock. As the availability of Capesize vessels has dwindled, Panamaxes have also been used to haul iron ore cargos. Within the Panamax sector there is an emerging sub-class known as Kamsarmax. Typically between 80,000 and 100,000 dwt, they are built with a higher cubic capacity than the standard Panamaxes. The Kamsarmax ship is ideally placed to take advantage of the current high demand for iron ore and associated minerals. They combine the versatility of the Panamax build, with the “economies of scale” advantage of a greater lift, which should enhance trading flexibility. Most Panamax and Kamsarmax vessels are “gearless” and therefore must be served by shore based cargo handling equipment. However, there are a small number of vessels with on board cranes, a feature which enhances the trading flexibility of the ship and helps to service ports with poor infrastructure.

Handymax/Supramax
Handymax vessels have a carrying capacity of between 30,000 and 60,000 dwt. These vessels operate on a large number of geographically dispersed global trade routes, carrying primarily grains and minor bulks. The standard vessels types are usually built with 25-30 ton cargo gear, enabling them to discharge cargo where grabs are required (particularly industrial minerals), and to conduct cargo operations in countries and ports with limited infrastructure. This type of vessel offers good trading flexibility and can therefore be used in a wide variety of bulk and neobulk trades. As in other sectors, average vessel size has also increased in the Handymax sector and recently a new sub-class of ships has emerged which are referred to as “Supramax.” Supramax bulk carriers can be defined as ships between 50,000 to 60,000 dwt, normally offering cargo loading and unloading flexibility with on-board cranes, while at the same time possessing the cargo carrying capability approaching conventional Panamax bulk carriers.

Handysize
Handysize vessels have a carrying capacity of up to 30,000 dwt. These vessels are almost exclusively carrying minor bulk cargo. Increasingly, ships of this type operate on regional trading routes, and may serve as trans-shipment feeders for larger vessels. Handysize vessels are well suited for small ports with length and draft restrictions. Their cargo gear enables them to service ports lacking the infrastructure for cargo loading and unloading.

The following table shows the indicative deployment of dry bulk carriers by size category. Within the fleet there is also a further distinction to be made between “geared” and “non-geared” ships. Geared ships refers to vessels that have a loading/unloading system on board the vessel itself—this could either be in the form of moving gantry cranes or fixed wire luffing cranes. Examples of geared vessels are shown below.

As such, geared ships do have a trading advantage over non-geared vessels and this additional flexibility is attractive to charterers, especially if the vessel will be required to trade to ports with poor shore based loading/ unloading facilities. Indeed, in some parts of the world, notably the Indian Sub-Continent and Africa, port facilities remain under-developed and geared vessels will be preferred.
In general, cranes are normally found on the smaller bulk carriers of either Handy or Handymax size and the number of ships with cranes of Panamax size and above is quite small. This is because the larger bulk carriers tend to find most of their employment of iron ore and coal trades, where load and discharge ports have dedicated shore-based loading/unloading facilities. Conversely, smaller bulk carriers require on board cranes as they trade to ports where loading and unloading facilities are less well developed, to the extent that in many cases, loading/ unloading can only take place using the ships gear.

Current Fleet
In September 2007, the world fleet of dry bulk carriers consisted of 6,654 vessels, totaling 386.6 million dwt in capacity. It should be noted, however, that these figures are based on pure dry bulk carriers, and exclude a small number of combination carriers. The following table presents the world dry bulk carrier fleet by size category as of June 2007.
Naturally, the fleet has developed in size to meet the growth in seaborne trade and vessel demand, but it is interesting to note that in the period 2001 to 2006 the CAGR in supply, expressed in terms of deadweight tons, was 4.6%. This compares with an increase in ton mile employment of 6.9% and it helps to explain why the freight market has tightened and freight rates have risen.

The following chart shows dry bulk carrier fleet development in terms of dwt (millions).
The supply of ships going forward is a function of the number of vessels to be removed through scrapping (which is largely dependent on the age profile of the fleet and the freight market) and the number of new deliveries from the orderbook.
Age Profile
The chart below shows the age profile of the overall dry bulk carrier fleet as of September 2007. The bulge in the mid-1980’s represents trading vessels that were ordered in response to the strong freight markets of earlier in the decade. Similar bulges can be seen in the late 1990’s (in response to a strengthened market in the middle of the decade) and at present. The average age of dry bulk carriers currently in service is approximately 15 years.
The age profile of the fleet is a guide to future levels of scrapping and, looking forward, it is tonnage built up to the early 1980s that is liable to become candidates for demolition in the next couple of years. In terms of fleet sectors, the table below shows the age and size breakdown of the Panamax and Kamsarmax fleet. The table illustrates the big group of older Panamax built during the early 1980’s boom, and shows how the size preference within the category shifted to vessels above 70,000 dwt in the 1990’s and is now moving to the Kamsarmax vessels above 80,000 dwt.

Shipping ( Bulk Carriers) - General(1)

The marine industry is a vital link in international trade, with oceangoing vessels representing the most efficient, and often the only means of transporting large volumes of basic commodities and finished products. Seaborne cargo is categorized as dry cargo or liquid cargo. Dry cargo includes dry bulk cargo, container cargoand non container cargo. Dry bulk cargo is shipped in dry bulk carriers, while container cargo is shipped in 20 or 40 foot containers on specialized container ships. Non-container cargo includes other dry cargo that cannot be shipped in a container due to size, weight or handling requirements, such as large manufacturing equipment or large industrial vehicles. Most of this cargo will be shipped in general cargo and/or multi-purpose vessels.

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
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.

The following table provides a summary of steam coal imports by major importing countries/economic regions for the period between 2001 and 2006.

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.

The following table provides a summary of steam coal exports by major exporting countries for the period between 2001 and 2006.

Grain
Grains 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.

Minor Bulks

The balance of dry bulk trade, minor bulks, subdivides into two types of cargo. The first type includes secondary bulks or free flowing cargo, such as agricultural cargoes, bauxite and alumina, fertilizers and cement. The second type of minor bulks are the so-called neo-bulks, which include non-free flowing or part manufactured cargo that is principally forest products and steel products, including scrap. In 2006, trade in minor bulks constituted approximately 39.0% of total seaborne dry bulk trade.

Asian Dry Bulk Trades
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.

China
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.

In 2006, Indian coal production increased by 4.5% over 2005. Even so, India was faced with a coal deficit of 21.2 and 28.0 million tons of oil equivalent (mtoe) in 2005 and 2006, respectively, which had to be met by imports transported by sea in dry bulk carriers.

Indian consumption of coal in 2006-7 is placed by government sources at 473 million tons, an increase of 25.0% on the previous year. Sector-wise, power generation now accounts for over 70.0% of domestic demand and power generation is now the fastest growing consumer of coal.

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 coal sector was liberalized in India post 1990s. At present, coal falls under Open General Licence, which means that consumers of coal can import coal independent of governmental control. Currently, coking coal is being imported by Steel Authority of India Limited (SAIL) and other steel manufacturing units, mainly to bridge the gap between their requirements and indigenous availability and also to improve the quality. Coast-based power plants, cement plants, captive power plants, sponge iron plants, industrial consumers and coal traders are also importing non-coking coal. Coke is imported mainly by pig-iron manufacturers and iron and steel sector consumers using mini-blast furnaces.

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.

India’s current coking coal requirements are estimated to be above 0.7 tons for every one ton of steel. Domestic output is insufficient to meet the steel industry’s demands, thus paving the way for imports. Of the key suppliers of coking coal to India, Australia dominates on account of its physical proximity and the high quality of the mineral. The other major suppliers include China and the USA.
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.

Within dry bulk trades there are certain main trading routes for major dry bulk commodities. Coal is mainly shipped from Australia and Canada to the Far East and Europe, whereas iron ore is mainly shipped from Australia and Brazil to China, Japan and Europe. Grain is mainly shipped from the U.S. Gulf, Brazil or Argentina to Europe and the Far East.

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

Shipping ( Bulk Carriers) - Common Technical Terms

“back haul cargoes” : Cargoes transported against the standard flow of traffic, i.e. loading in a port situated in what is usually a discharge area, and discharging in a port situated in
what is usually a loading area
“ballast day(s)” : Day(s) on which a vessel performs a voyage without cargo on board
“Baltic Dry Index” : Daily index that measures the cost of booking cargoes on 24 key dry bulk routes
“bareboat charter” : A charter contract where the vessel is chartered out without crew for a specific period of time and where the operating costs of it are borne by the charterer
“bulk cargo” : Cargoes that are shipped loose in the holds of a vessel without mark and count. Examples include cement, coal, grain, lumber, minerals, ores etc.
“bulk carrier” : A vessel designed to carry dry bulk cargo. Depending on carrying capacity, such vessels can transport cargoes of as low as 10,000 dwt to more than 200,000 dwt
“bunkers” : Fuel, consisting of heavy fuel oil and diesel oil burned in the vessel’s engine
“Calendar days” : An indicator of the size of the fleet over a period. Calendar days are defined as the total number of days in a period during which each vessel in the fleet was in the shipowner’s possession including off hire days associated with major repairs, drydockings or special or intermediate surveys
“charter” : A contract for the commercial leasing of a vessel or space on a vessel
“charterer” : A person, firm or company hiring a vessel for the carriage of goods or other purposes
“charter-hire” : The revenue earned by a vessel pursuant to a time charter
“charter party” : A contract between a shipowner and charterer for the charter of a vessel
“contract of affreightment” or “COA” : The same as voyage charters but are for two or more shipments over an agreed period of time. This could be over a number of months or years “dry bulk cargo” : Cargo that is not liquid and normally does not require temperature control
“drydocking” : A vessel placing in a dock or slipway for inspection, maintenance and/or repair of underwater parts
“dwt” or “deadweight tonnes” : The unit of measurement of the maximum weight capacity of a vessel, which is the total weight the vessel can carry, including cargoes, bunkers, water, stores, spare parts, crew, etc. at a specified draft. One dwt equals 1,000 kilogrammes
“flag state” : The country in which a vessel is registered. A vessel is generally required to fly the sole flag of a registered country
“freight” : The revenue earned by a vessel pursuant to a voyage charter or contract of affreightment
“grt” or “gross registered tonnage” : Measure of the overall volume of a vessel determined in accordance with the National or 1969 International Tonnage Regulations
“Handysize” : A dry bulk carrier of 10,000 to 39,999 dwt which is commonly equipped with cargo gear such as cranes. This type of vessel carries principally minor bulk cargoes and
limited quantities of major bulk cargoes. It is well-suited for transporting cargoes to ports that may have draft restrictions or are not equipped with gear for loading or
discharging cargoes
“Handymax” : A dry bulk carrier of 40,000 to 59,999 dwt used to carry either minor bulk or major bulk cargoes
“major bulk” : Dry bulk cargoes consisting of iron ore, coal and grain
“mdwt” : Million of deadweight tonnage
“minor bulk” : Dry bulk cargoes such as forest products, iron and steel products, fertilisers, agricultural products, minerals and petcoke, bauxite and alumina, cement, other construction
materials and salt
“newbuilding” : A vessel which is under construction
“off hire” : Period during which a vessel is temporarily unable to operate under the terms of its charter, resulting in loss of income under the charter party
“operating costs” : The costs of technical operations of vessels including the costs of lubricants, spare parts, repairs and maintenance, crewing costs and insurance costs (but excluding capital costs and voyage costs)
“Panamax” : A dry bulk carrier of 60,000 to 84,999 dwt with breadth not exceeding 32.2 metres which permits it to transit, when fully loaded, the Panama Canal. Panamax vessels are primarily used to transport major bulks, although they can be used to transport certain minor bulks such as fertilisers, ores, petcoke and salt
“P&I” : Protection and indemnity. This denotes the insurance coverage taken by a vessel’s owner or charterer against third party liabilities such as oil pollution, cargo damage, crew injury or loss of life, etc.
“spot charter” : Immediate or ad hoc charter, when a vessel happens to be at or in the vicinity of the port of loading. Normally for short duration to cover the intended voyage
“spot market” : The market for immediate chartering of a vessel, usually
for a single cargo or short-term trading
“tanker” : A vessel designed for the carriage of liquid cargo in bulk such as crude oil, products or chemicals
“time charter” : Charter for an agreed period of time where the ship owner is paid on a per day basis and is responsible for operating the vessel and paying the operating costs while
the charterer is responsible for paying the voyage costs and bears the risk of any delays at port or during the voyage except where caused by a defect of the vessel
“tug” or “tugboat” : A vessel with powerful propulsion engines designed for towage and easy manoeuvrability. Normally used for berthing and unberthing operations
“vessel operating expenses” : Consists of crew expenses, insurances, spare parts, stores and lubricating oils, vessel repairs and surveys (including drydock costs) and other costs
“voyage charter” : Charter under which a ship owner is paid freight on the basis of the weight of cargo moved from a load port to a discharge port and is responsible for paying both operating costs and voyage costs
“voyage costs” : Bunker costs, port charges and canal dues (or tolls) incurred during the course of a voyage
“Voyage days” : A measure of the number of days in a period during which vessels actually generate revenues. Voyage days are defined as the calendar days net of off hire days
associated with major repairs,

Shipping (Bulk Carriers) - Known Customers and Suppliers of Courage Marine

CUSTOMERS
Taiwan Power is the largest power company in Taiwan which imports coal from China, Indonesia and Australia etc., for its coal-fired power plants in Taiwan.

China Coal Hong Kong Ltd is an exporter of coal from China, which is a subsidiary of China Coal Energy Group Corporation. China Coal Energy Group Corporation is one of the largest stated-owned enterprises of coal mining, distribution and exporting.

Glencore International AG Baar is a Swiss trading company of coal, metals, and minerals.

GIC Shipping International Inc is the shipping division of Green Island Cement (Holdings) Ltd in Hong Kong.

Formosa Plastics Corp is one of the largest industrial groups in Taiwan that also operates power plants for its own and third parties’ use in major industrial regions in Taiwan.

SHUN SHING GROUP is well recognized as a leader in import and export of commodities like Cement, Clinker, Gypsum, Limestone, Rock Phosphate, Coal, Blast Furnace Slag, Fly Ash, Chemical Fertilizers, Industrial Chemicals, Petrochemicals, Iron Ore, Sulphur and Paper in Asia and Europe region. The Group has a yearly turnover of around HK$ 4 Billion and employs more than 600 people. The Group is focused on its core business of Cement & Clinker trading while simultaneously diversifying investments in the Cement Industry, Cement Sacks Manufacturing, Phosphate Fertilizer Manufacturing, Construction, Turn Key Industrial Projects, Real Estate Development, Information Technology Services and Shipping

Sino-Indo Co, Ltd is a company in the business of coal trading.

Rio Tinto is one of the world's leading mining and exploration companies. We find, mine and process the earth's mineral resources - metals and minerals essential for making thousands of everyday products that meet society's needs and contribute to improved living standards.

Apo Cement Corporation is a company in Phillipines producing cement

Accord International Marine Services Corp

Phoenix Commodities Pte Ltd

SUPPLIERS

Bomin Bunker Oil Pte Ltd - Supply of Fuel to Courage Marine
Cosco Shipyard (Guangzhou) Co Ltd - Provide Maintenance Services to Courage Marine
Bridge Oil Pte Ltd - Supply of Fuel to Courage Marine
China Tianjin - Supply of crew to Courage Marine

Shipping( Bulk Carriers) - General

Dry Bulk Shipping Industry

In commercial shipping markets, cargoes are carried either in bulk form, within the hold of a vessel, or in non-bulk form, in standardised containers or cargo ships. The bulk shipping industry comprises the seaborne carriage of both dry bulk and liquid bulk cargoes.

Dry bulk cargoes can be classified as major bulk cargoes or minor bulk cargoes, both of which are shipped in bulk form, although some minor bulk cargoes may alternatively be carried in non-bulk form or, if in bulk form, in vessels smaller than 10,000 dwt. The major bulk cargoes include minerals, industrial raw materials and various agricultural products, of which iron ore, coal and grain are the most important. The minor bulk cargoes include forest products, steel products, fertilizers, petroleum coke, bauxite and alumina, cement, other construction materials and other agricultural products. The major bulk cargoes have historically contributed more than 50% (in terms of cargo volumes carried) of overall dry bulk cargoes shipped internationally.

Liquid bulk cargoes comprise crude oil, refined petroleum products, LNG, LPG, ammonia in gaseous state, petrochemical gases and liquid chemicals in bulk form.

As set out above, global seaborne dry bulk trades(2) increased by an estimated 7.8% in volume terms from 2003 to 2004. Iron ore, coal (steam and coking) and grain comprised 33.7%, 38.3% and 15.5% respectively of total global seaborne dry bulk trades in 2004 of 1,755.7 million tonnes. In comparison, this 7.8% growth from 2003 is approximately 2.4 times higher than the annual average growth of global seaborne dry bulk trades for the period 1983 to 2002 inclusive.

The growth of 7.8% in the volume of global seaborne dry bulk trades was driven primarily by the growth of dry bulk trades in iron ore, coal (steam and coking) and steel products of 12.3%, 7.3% and 12.7% respectively. The relatively large growth in the shipment of iron ore cargoes of 12.3% is attributed to factors such as the increased supply of iron ore material from newly expanded mining capacity in Australia, and the continued expansion of global steel output, driven primarily from the rapid steel production growth in China, the world’s largest steel producer. The increase in the volumes of coal transported was mainly in response to firm energy demand mainly from Asian electricity generators.

In addition to the increase in global seaborne dry bulk trade, the distribution of the global seaborne dry bulk trade has shifted significantly from Western Europe to the Far East Asia region (this includes Japan, South Korea, Taiwan and China). As illustrated above, in 2004, the Far East Asia region accounted for approximately 60% (in volume) of world imports of the three main cargoes of seaborne dry bulk trade (iron ore, coal and grain), compared to approximately 47% (in volume) of world imports of iron ore, coal and grain in 1989. Furthermore, between 1989 and 2004, cargo volumes shipped to Far East Asia rose in absolute terms from approximately 387 million tonnes in the former year to an estimated 826 million tonnes in the latter, with most of this growth led by greater import demand by China.

Dry Bulk Carrier Freight Market Developments
The Baltic Dry Index is the most widely used indicator of overall conditions in dry bulk shipping markets. For much of 2002, the dry bulk freight market remained relatively stable, before undergoing a steady rise from September 2002 onwards. This rise in the Baltic Dry Index accelerated from September 2003 onwards and continued into early 2004, only to be followed by a sharp downward adjustment in the second quarter of the year. Since then, however, the Baltic Dry Index has scaled another all-time peak in early December 2004 before moderating to levels that were, on average, around 35% below this new record in the first half of 2005. Since July 2003, the Baltic Dry Index has averaged 3,915 points. This is around three times the average of 1,306 points that prevailed over the entire period January 1985 to June 2003 inclusive, before the present market upturn.

The strength of dry bulk shipping markets since the third quarter of 2003 has principally resulted from firm cargo demand; the substantial (and heightened) volatility exhibited by the Baltic Dry Index, which ranged from 882 points since the start of 2002 to a peak of 6,208 points on 6 December 2004 has reflected the tightness in tonnage demand and supply conditions. However, very firm charter rates for all sizes of dry bulk carrier have also partly resulted from bottlenecks in cargo handling capacity at key loading and discharge terminals. These have resulted in significant port congestion, thereby occupying many vessels for long periods and so reducing the availability of tonnage for prompt trading.

Overall Trends in Dry Bulk Carrier Fleet Size and Age Composition
In the past decade, overall dry bulk carrier supply has risen appreciably in net terms, as new ship construction has outweighed removals from the fleet via scrapping, conversion or casualty. The dry bulk carrier fleet (excluding ships below 10,000 dwt) had risen from 228.1 mdwt as at the end of 1994 to 321.5 mdwt as at end-2004, leading to a net expansion of an estimated 93.4 mdwt, this representing an increase of 40.9%. In terms of tonnage, much of 2004’s rise in ship supply was heavily concentrated in the Capesize sector (an increase of 7.7 mdwt). However, net expansion ensued in all size groups, with the Panamax, Handymax and Handysize fleets rising by 5.6 mdwt, 3.8 mdwt and 1.2 mdwt respectively.

As illustrated above, as at end-July 2005, dry bulk carrier supply (excluding ships of 10,000 dwt and below) amounted to 6,013 ships of 335.6 mdwt. However, the age profile of the fleet varies significantly between respective size groups, with a particularly heavy concentration of older ships in the Handysize category. Around 22.1 mdwt of Handysizes (or 30.0% of tonnage in this size range) are already at least 25 years old. Given that the average age at which bulk carriers are typically scrapped is around 28 or 29 years old, these vessels are likely to be candidates for demolition before the end of the present decade. At just 4.3 mdwt, the Handysize orderbook represented approximately 5.8% of existing tonnage in this size sector at end-July 2005 – a far lower proportion than for any other size segment in the whole dry bulk carrier fleet. This implies the potential for ship supply to decline significantly in net terms within
the next five years, which would serve to offset some of the prospective growth in Handyma (40-59,999 dwt) supply in the corresponding period.

The Handymax fleet is far more modern than that for Handysizes, with just 4.2 mdwt (or 6.5% of tonnage in this size range) of ships currently at least 25 years old. The Handymax orderbook as at end-July 2005 stood at 12.8 mdwt, or 19.9% of existing tonnage in this size segment.

In the Panamax fleet, the supply of ships of at least 25 years old is also very limited, at 4.4 mdwt (equating to 5.1% of tonnage in this size segment), against a current orderbook of 16.5 mdwt or 19.2% of existing tonnage in this size segment.

Based on the age profile and orderbook of the Handysize fleet as at end-July 2005, the net fleet expansion for this size range is expected to be relatively limited in 2005-2010 inclusive. This is due to a) the high proportion of older ships in the existing fleet (which implies that the potential exists for a revival of scrapping) and b) the limited orderbook in this size segment.

For many years, exporters of various dry bulk commodities have regarded China as a potentially massive market; yet, by international standards, the proportion of Chinese demand met to date by imported supplies has been very low. However, with the rapid pace of economic development in China, and the strength of steel demand in China, the demand for iron ore imports (shown above) has been the principle factor leading to significant firmness in the dry bulk freight market since late 2003.

In addition to China’s mounting importance as an importer of dry bulk commodities, the country also generates significant employment for dry bulk carriers via its coal exports, with steam coal (including anthracite) accounting for approximately 93% of China’s total coal exports. As illustrated below, in overall terms, coal exports have risen from 37.4 million tonnes in 1999 to more than 80.0 million tonnes p.a. since 2001. The volume of China coal exports is expected to be sustained at levels in excess of 75.0 million tonnes in 2005 and 2006. In 2004, China exported 86.6 million tonnes of coal (mainly steam coal), with Japan, South Korea and Taiwan collectively receiving approximately 85.0% of its total coal exports. Given the relatively short-haul nature of these coal exports from China, these shipments are typically carried in Panamax tonnage or smaller tonnage ships.

source: Courage Marine IPO Prospectus