Assessing key trends in the Australian maritime economy

Assessing key trends in the Australian maritime economy Ports Australia 44 th Biennial Conference 21 24 October 2014 Perth David Bayne Port Economist bayne@drewry.co.uk

Table of Contents Ship traces and the iron ore trade Valemax and Wozmax - competition with Brazil What the share market thinks (who is stronger?) LNG ship fleet Container fleet and what this has meant for ports Our port pricing, fair value and our fear of feedback

Ship traces from AMSA

Ship traces combined Heavily weighted by iron ore

The traces reflects Australia's iron ore mainly to China

The competition for the iron ore trade (to China) Brazil Australia Brazil does not intend to leave it that way

Brazil forecasts growth at 4.5% pa with new mines opening New Brazilian mines are being opened by Anglo American, CSN and Vale

View from our competition Vale Web site That was their plan then but the result was very different

Baltic dry index and Valemax decision Valemax announcements during the ship charter rate bubble Vale did not want to be held hostage to the charter market so they ordered their own vessels Instead they became hostage to the Chinese authorities

The Chinamax to Valemax The Valemaxsize ships as ordered by Valehave a deadweight tonnage of just over 400,000 tonnes. In 2009 the Chinese government banned them for being too large. Vale repainted the load line and declared the ships were 380,000 DWT. Thus these same vessels "regained" their ability to re-enter the same ports they were previously declared too large to enter. Subsequently the Chinese government banned all ships over 300,000 DWT, effectively banning the Valemaxships from entering Chinese ports.

The competition from Brazil now increases On 12th September this year, Cosco, China's largest shipping company, announced it will charter 14 Valemax and plans to dock them in Chinese ports. A cost saving of about $5 to $7 per ton of ore compared to transhipment in Asia.

Has Vale overcapitalised? What do the markets think? How did the ship charter market (Baltic Dry Index) react? How did the share market react?

How did the market react to the Cosco announcement in September? Vale share price In USD BDI

The Wozmax response

Evolution of standard Capesize ships Year of build Dwt ( 000) Beam (m) Loa (m) Draft (m) 1981 138 43 270 16.8 1990 149 43 270 17.3 2000 171 45 288 17.7 2010 180 45 292 18.2 Wozmax (Namura) 250 57 330 18.1 Source: Braemar Seascope

Since the introduction of the Valemax how has the Vale share price compare to BHP and Rio? BHP Rio Vale non-government shareholding

Iron ore summary The competition is set to become more intense with China supporting the Valemax. Nonetheless, the market considers Australia to be in the stronger position. Hope for higher oil prices (bunkers)

LNG Q-Max

LNGfleet in cubic metres by age LNG fleet by cubic metres 300,000 250,000 200,000 150,000 100,000 Cubic metres 50,000 50 45 40 35 30 25 20 15 10 5 0 0 Age in years

Design vessel LNG Q-Max 345 m Beam LOA Draft Capacity 53.8 m 12 m 266,000 cubic m LNG

120 100 80 60 40 20 0 LNG order book 2014 LNG order book - Oct 2014 50,000 75,000 100,000 125,000 150,000 175,000 200,000 225,000 250,000 275,000 25,000 Cubic metres No big surprises for this fleet 0 Number of vessels

Vale said that China changed the global economy, we say that the box made this possible.

Container shipping outlook

Container fleet global context

The 10,000 Teu vessel is less than 5 years old Teu range Existing fleet average age in yrs <1000 15.8 1000-1999 11.5 2000-2999 11.4 3000-4999 8.8 5000-7999 8.8 35% of the 8000-9999 5.5 capacity 10000-11999 3.3 12000+ 2.3 Grand Total 10.7

Comparison of the existing fleet and the order book Teu range Teu range

The 18,000 teu vessel new in 2013 Blockier with 2,500 TEUs more capacity due to the Urather than Vshape Designed for slower steaming cruising at 19 knots vs. 24 knots DWT 165,000 tonnes LOA 400 metres Beam 59 metres Containers across weather deck 23 rows Service speed 19 knots Draught 14.5 m 20% less fuel consumption than the E-class vessel of 15,500 TEUs

World shipping traces for cargo vessels Displacing 8,000 and 10,000 Teu vessels on to the North South routes

This is what it has meant for ports

Port restrictions

9,800 Teu vessel in Brazil

Australian container shipping

Australia in context Largest container ship into Australia

Cost savings for Australian importers/exporters Shipping lines will nearly always choose the largest vessel that they can fill with cargo on a weekly rotation. The cost savings to Australia of upgrading from a 4,800-teu to 8,000-teu Our current ship size Voyage cost per TEU for Melbourne Singapore service An upscaling to 8,000 Teu ships would save $140 per teu on the China route Source: Drewry And this benefit would be enjoyed by all States

Melbourne s critical constraints Constraints: Approach channels are limited to 14 m and 0.6 m tidal assistance ; The Harbour Master s instructions limit vessels to 300 m LOA; Beam restrictions within Swanson Dock depending on conditions; Westgate Bridge 50 m plus 2 m exclusion zone; Webb Dock could possibly handle larger vessels but the design vessel for the capacity upgrade has been limited to ships of 300 m LOA (some 6,000 teu); and Port Phillip Heads while having 17 m draft, is difficult due to currents and likely to restrict vessels above 6,500 teu. NB: the lack of rail is considered a disadvantage but not a deal breaker at Webb Dock.

Australian container ship sizes The location was chosen in 1835 Emma Maersk -LOA 398 m An 1835 mainliner -LOA 48 m

Port pricing -always difficult Reference to wharfage in Melbourne - 1841

Wharfage in Melbourne in 1841 Larger Vessels requiring over 3 metres of water were required to lighter vessels into Hobson's Bay for high rates of lighterage. This cargo would be loaded onto mud banks. Wharfage was paid even though no wharves were present. The lighterage of 30 shillings per ton in the year 1841 equates to about GBP840 (1.78) or AUD 1,495. Source: Victorian Archaeological Survey

Modern lighterage

Source: Moorways Pty Ltd Melbourne 1841 No wharves but planks to keep the cargo off the mud. But wharfage was charged

Freight index Oct 2014 vs 1841 What would $1,049 buy us today? The rate from China to America is $1,761 per 40 ft unit The rate from China to Europe is $1,202 per 20 ft unit Source: BMI

Monopoly abuse was alive and well in 1841 What are our terminal handling charges (THCs) today?

$400.0 $350.0 $300.0 $250.0 $200.0 $150.0 $100.0 $50.0 $- How do our THCs compare? THC by country USA Vietnam Norway Malaysia Korea Indonesia Ireland Taiwan Cyprus Finland Thailand Poland China Nth/East Singapore Croatia Portugal Denmark Philippines UK China Sth Sweden Belgium Netherlands France Italy Spain Hong Kong New Zealand Germany Russia Japan Canada Australia Source: NYK website and current exchange rates Estonia USD

Three basic port charges

Unimproved Capital Value in Port Pricing Is UCV pricing an excuse for monopoly abuse?

What should a port landlord charge for rentals? In addition to Wharfage In addition to wharfage

Brisbane moved container ships from Hamilton to Fisherman Islands

Sydney moved container ships from Port Jackson to Port Botany

UCV pricing for port land rentals A market based signal for when to relocate a port from a city centre But hiking land rentals is not an excuse for monopoly abuse Where there is no option for port users then the UCV is an impaired valuation

Summary Despite increased competition our position appears to be stronger than Brazil s for the iron ore trade LNG fleet shows no surprises The container fleet continues to upscale putting pressure on ports around the world Australia s port pricing needs reviewing

Assessing key trends in the Australian maritime economy Ports Australia 44 th Biennial Conference 21 24 October 2014 Perth David Bayne Port Economist

What should port prices be? Benchmarking using standard accounting CARGO GROUP Rate based on volume/weight/size of cargo. For wharf handling, stevedoring special cargo handling, packing/unpacking, equipment/service/facility hire/passenger fee. CARGO GROUP Rate per unit or time period. For container craneage, stevedoring and cargo storage. NAVIGATION GROUP Rate per man/gang. For mooring/ unmooring ships. NAVIGATION GROUP Rate per unit of ship size and/or time. For pilot services. NAVIGATION GROUP Time involved Size and type of ship. For tug services. ROAD ROADWAY/STACKING AREA WHARF APRON BERTH DREDGING Within port waters Navigation aids Dredging Emergency services Breakwaters Pollution control Marine Security Channel dredging OTHER BUSINESS GROUP Land rentals For the use of the land area and to cover associated development and opportunity costs. BERTH GROUP WHARFAGE Rate based on volume of cargo. For the use of the wharf. BERTH GROUP Berthage or Berth hire rate per LOA hour area hire fees NAVIGATION GROUP HARBOUR DUES per Gross Tonnes per visit For ship access from sea to berth. Per TEU Rate NAVIGATION GROUP Conservrncy goes to Government. Rate per ship tonnage per arrival For navigation aids outside of port waters. Revenue from Ship owners' account A reference for those interested in transparency Revenue from Cargo owners' account

Container vessels by ship numbers and by capacity 1400 1200 1000 800 600 400 200 0 Number of ships by Teu capacity range 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 - Capacity of the vessels employed by Teu range Teu range Teu range For ports this means larger vessels but fewer calls