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HEAD OF RESEARCH Christopher Rex, rex@shipfinance.dk ANALYTICAL TEAM Mette Andersen, mba@shipfinance.dk Ninna Kristensen, nmk@shipfinance.dk Sabine Janus, saj@shipfinance.dk TABLE OF CONTENTS SHIPPING MARKET REVIEW MAY 2014 EXECUTIVE SUMMARY, 1 GENERAL REVIEW AND OUTLOOK, 4 SHIPBUILDING, 13 CONTAINER, 19 CRUDE TANKER, 26 PRODUCT TANKER, 34 LPG TANKER, 43 DRY BULK, 50 GLOSSARY, 58 EXECUTIVE SUMMARY SHIPPING MARKET REVIEW MAY 2014 EXECUTIVE SUMMARY Pleasereadthedisclaimeratthebeginningofthisreportcare-fully. The report reviews key developments in shipping markets and the main shipping segments during the period January 2013 to April 2014 and indicates possible future market directions. THESHIPPINGINDUSTRYISUNDERGOINGAPROCESSOF TRANSITIONDRIVENBYACOMBINATIONOFTECHNOLOGICAL ADVANCESRELATEDTOFUELEFFICIENCYANDENVIRONMEN-TALREQUIREMENTS.WEEXPECTSEVERALSHIPPINGSEG-MENTSTOFACESIGNIFICANTHEADWINDSFROMFUTURE SUPPLYUNTILANEWBALANCEBETWEENSUPPLYANDDE-MANDHASBEENESTABLISHED.FREIGHTRATEVOLATILITY MAY INTENSIFY IN THIS PERIOD AND OLDER VESSELS ARE EX-PECTEDTOBESCRAPPEDPREMATURELYINSEVERALSEG-MENTS. SECONDHAND VALUES ARE EXPECTED TO MIRROR THE MARKETFRAGMENTATIONBETWEENFUELEFFICIENTVESSELS AND OLDER VESSELS, AND OLDER VESSELS MAY FACE UNUSU-ALLYHIGHVALUEDEPRECIATIONS.THESEEXTRAORDINARY CHANGESREPRESENTNOTONLYATHREATBUTALSOANOP-PORTUNITY FOR THE SHIPPING INDUSTRY. GENERAL REVIEW AND OUTLOOK Thelandscapeoftheglobaleconomyhasbeenintransitionin recentdecades.Thegrowingglobaleconomicdependenceon the Chinese economy is the most obvious, but not the only, ma-jor transformation during the last ten to 15 years. The globalisa-tioningeneralandtheinsatiabledemandforenergyandraw materials,inparticular,haveeffectivelyreshapedinternational tradeflowsduringthelastdecade.Mostshippingsegments havebenefitedsubstantially,asweallknow.Butintheafter-mathoftheglobalfinancialcrisis,globaltradevolumegrowth hasslowedsubstantially,mirroringthestrongerthanexpected declineineconomicgrowthacrosstheglobe.Thisdeceleration hasfuelledquestionsaboutwhetherinternationaltradewillre-mainanengineofglobalgrowth.Wetrulybelieveso,butthe short to medium-termoutlook for the global economy suggests that world trade volumes will grow on a par with world GDP ra-therthanbyamultiple,asinthepast.Thisisnotcausefor alarm in itself, but in combination with several oversupplied shippingmarketsandstrongcontractingactivity,riskseemsto be building up. Buying low and selling high has always been the recipe for good investments.Intodaysshippingmarkets,investorsandtradi-tional shipowners are taking advantage of historically low prices to purchase both new ships and secondhand vessels. Theirinvestmentstrategyvariesbut,asweknow,manyroads lead to Rome. Some are investing in fuel-efficient newbuildings, compliantwithtomorrowsstandardstoday,whileothersare choosing to buy and maybe retrofit older vessels. Owners with a portfolioofexpensiveandhighlyleveragedvesselsarestrug-glingtofindopportunities.Shippingisnotateamsportand neverwillbe,buteveryoneisvulnerabletounexpectedvalue depreciations. We expect premature scrapping to be the new norm until a new balancebetweensupplyanddemandhasbeenre-established. Thevalueimplicationofprematurescrappingcouldeasilyturn out to be a shorter cash-flow period. If this filters through to the valuation of the vessels, secondhand prices for older and ineffi-cient vessels could be subject to unexpected depreciations. Up to now, it has primarily been the tanker segments that have attractednewinvestorsattention.ButthePost-Panamaxcon-tainer segment and some of the offshore supply segments seem equally exposed tofutureoversupply issues.The dry bulk mar-kets belief in future Chinese commodity demand is a story of its own. We share this optimism from a short to medium-term per-spective,butweremainscepticalaboutthelong-termpro-spects. We argue that China is on the brink of a transition to a service-basedeconomy.Therebalancingexerciseisabout switching Chinas growth model away from investment and more towards private consumption. Lower investments may eventual-lyreduceChinesecommodityconsumption,andhencereduce the growth in Chinas dry bulk demand. In our view, this process willhappenbeforethevastmajorityoftheCapesizefleetbe-come obvious candidates for scrapping. Danish Ship Finance (Danmarks Skibskredit A/S) Shipping Market Review - May 20141Itisimportanttorememberthatsomesegmentsarecurrently maintaining a reasonably good balance between supply and de-mand.Thesesegmentsareinparticulargascarriers,someoff-shoresupplysegmentsandsomeofthesmallernichemarkets (e.g. car carriers). But the general market recovery that seemed withinreachsixto12monthsagoisabouttoevaporatewith investorscontinuedappetiteforvessels.Acoolingofthecon-tractingactivitywouldbewelcoming.Butwhentakingintoac-count the vast shipyard capacity, the low newbuilding prices and thesupportfromlocalexportcreditagencies,itseemsalmost toomuchtohopeforparticularlyforthecommoditisedseg-ments of shipping. SHIPBUILDING Theglobalyardindustryisinthemidstofaconsolidationpro-cess whereby inefficient yards are closing and capacity is gradu-allyadjustingtolowerfuturedemand.Newbuildingpriceshave beenonastructuraldeclineduringthelastfiveyearsandare expected to remain low until the consolidation process has come to an end. Still, the high contracting activity in 2013 has blurred thepicture,asithasenablednewbuildingpricestoincreaseat yards that have attracted new orders. To us, the price increases simplyreflecttheongoingselectionprocesswherebyinefficient yardsgooutofbusinessandsustainableyardsattractnewor-ders. By 2016, we expect global yard capacity to have returned to the 2008 levels. We argue that as long as global yard capaci-ty has not adjusted to a lower future demand, newbuilding pric-es will remain on a structurally declining trend. Clearly, yard ca-pacityvariesgreatlybetweenshipsegments,butforthelow-specvessels,wefinditpossiblethatnewbuildingpricescould decline as soon as in 2015. CONTAINER The container market remains highly fragmented between mod-ernandoldtonnage,smallerandlargervesselsandlinersand tonnage providers. The supply surplus is massive and everyone is struggling to optimise operations. In some segments tonnage providers are, to someextent, being penalised by the liners for the overcapacity, as trade routes are being optimised through operational consolidation and extensive cascading of larger ves-selsontosmallervesselstraderoutes.Thetimechartermarket remains depressed, reflecting the miserable situation many ton-nage providers are facing. ExtensivescrappingwithinthePanamax-transitablesegments hasbrightenedexpectationsforsomeofthese.However,the outlook for the Post-Panamax segment remains highly challeng-ing, as the fleet is too young to provide an adequate number of scrappingcandidates.Supplyremainsseveralyearsaheadof demand and there are more vessels to come. Still, liners have managed to keep box rates fairly high. It is dif-ficult to imagine how the current box rate level can be sustained in the future. However, the last few years have shown that box rates can be maintained at high, albeit volatile, levels despite a significant supply surplus. Timecharterratesareexpectedtoremainlowandthenumber of vessels idle or laid-up is expected to increase. Consequently, tonnage providers and owners with older and lessefficient ves-sels will continue to suffer. Post-Panamaxsecondhandvaluesareexpectedtodecouple from newbuilding prices. Secondhand prices have already start-edtoreflectthefactthatsomesizes,shipdesignsandengine typesaremoresuitableforthefuturemarketthanothers.But theissuetoconsiderforfuturesecondhandpricesishowand when the market will factor in that many vessels are eventually expectedtobescrappedprematurely.Weexpecttoseeex-traordinaryvaluedepreciationsforthemoreinefficientvessels within the next year or two. CRUDE TANKERS Thecrudetankermarketiscurrentlysufferingfrommassive oversupply,asitdidformostof2013aswell.In2013,freight ratesplummetedtotheir lowestlevelinmanyyears.However, towardsyear-end,acombinationofrecord-highChinesede-mand, weather-related delays and a slower fleet growth caused ratestosoarandtheBalticDirtyTankerIndexsurgedabove index 1,000. Consequently, positive sentiment returned to the Danish Ship Finance (Danmarks Skibskredit A/S) Shipping Market Review - May 20142market and so did contracting. In total, 17 million dwt was con-tracted in 2013, of which 9 million dwt was ordered in December alone,pushingbothnewbuildingandsecondhandpricesup-wards.Theunexpectedcontractingboomattheendof2013 dampenedthemarketoutlook.Thecrudetankerfleetisyoung andprematurescrappingseemsinevitableiffuturesupplyout-performsdemandbyalargemargin.However,changingtrade dynamicsandlongertraveldistancescouldpotentiallyabsorb the increasing inflow of vessels. PRODUCT TANKERS After a very tough 2012, the product tanker market improved in 2013.Freightratesgainedmomentum,especiallyatthebegin-ning of the year when a very cold and long winter in the north-ern hemisphere drove MR spot earnings to a level not seen since theheydayof2008.However,aroundautumnthemarket turnedandratesbegantoslide.Thishasbeenfurtherexacer-bated by the large number of newbuildings currently hitting the wateratarapidpace.Nevertheless,themassiveinflowofnew vessels is expected to continue, due to the substantial ordering activity that took place in 2013. Overall, close to 14 million dwt wascontracted,morethaninthepastfiveyearscombined. Consequently,themarketbalanceremainsextremelyfragile, butthegrowthindistance-adjusteddemandseemscapableof absorbingthefleetgrowthifolderandinefficientvesselsare scrapped. LPG TheLPGmarketremainsverytight.Spotratesareatrecord highsandassetvaluesareincreasing.Contractingactivity soaredin2013:morecapacitywascontractedlastyearthan duringtheprevioussixyearscombined,adding4.4millionCu.M. to theorderbook. Consequently, fleet growth is expected toreachdoubledigits in2015.Partofthefleetgrowth may be absorbed by the increase in long-haul trade between the US and Asia, as growth in the production of shale oil and shale gas has createdasignificantsurplusofLPGintheUS.However,atthe beginningof2016theexpansionofthePanamaCanalisex-pected to be finalised, with the result that distances between theAtlanticandthePacificwillbereduced,consequentlyin-creasingcargo-carryingcapacity.Onthepositiveside,theex-pansion will also lower transportation costs, and thus may result inahigherfrequencyoftradebetweenthetworegions.It thereforeremainstobeseenifdistance-adjusteddemandwill benefit from the expansion. DRY BULK Thedrybulkmarketremainsoversupplied.Freightratesare low,butsecondhandvaluesareclimbing,asstrongcontracting activitysupportednewbuildingpriceincreasesin2013.Supply outgrewdemand,butfleetgrowthwassignificantlylowerthan in previous years. For the first time in years, we see a glimmer ofhopeforthedrybulkmarket,assupplymaygrowlessthan distance-adjusted demand. Consequently, in a fleet growth sce-nario below 3%, freight rates and secondhand values could im-prove in 2014. But if improved market conditions motivate own-erstoincreasespeeds,therecoverycouldbeshort-lived.The outlook beyond 2014, however, is still dominated by a large or-derbook and an uncertain outlook for Chinese dry bulk demand. Eventhoughwedofindevidenceofpotentialmarketimprove-ments, we remain sceptical about the long-term prospects. Danish Ship Finance (Danmarks Skibskredit A/S) Shipping Market Review - May 20143GENERAL REVIEW AND OUTLOOK SHIPPING MARKET REVIEW MAY 2014 GENERAL REVIEW AND OUTLOOK THERECOVERYISSTRENGTHENINGBUTREMAINSUNEVEN. INVESTORSCONTINUETOORDERNEWVESSELSTOANAL-READYOVERSUPPLIEDMARKET.WEEXPECTPREMATURE SCRAPPINGTOBETHENEWNORMUNTILBALANCEBETWEEN SUPPLYANDDEMANDHASBEENRE-ESTABLISHED.INTHIS PERIODOFTRANSITION,INVESTORS,OWNERSANDTHEIR BANKSMAYFACEUNEXPECTEDVALUEDEPRECIATIONSEVEN ONRELATIVELYYOUNGVESSELS.THEMARKETRECOVERY THATSEEMEDWITHINREACHSIXTO12MONTHSAGOIS ABOUTTOEVAPORATEWITHINVESTORSCONTINUEDAPPE-TITE FOR NEW VESSELS. WORLD DEMAND INDICATORS THEREPERCUSSIONSOFTHEFINANCIALCRISISARESLOWLY DIMINISHINGANDTHERECOVERYISTAKINGHOLDINAD-VANCEDECONOMIES.BUTITSEEMSINEVITABLETHATTHE COSTSOFTHECRISISHAVEBEENHIGH.INCOMBINATION WITHANAGEINGPOPULATION,THESTRUCTURALISSUESRE-LATED TO HIGH UNEMPLOYMENT, LOW INVESTMENTS, PERSIS-TENTOUTPUTGAPS,TIGHTCREDITSANDLARGELEVELSOF DEBTHAVELOWEREDTHEFUTUREGROWTHPOTENTIALIN MANY BOTH EMERGING AND ADVANCED ECONOMIES. EVEN THEGROWTHPOTENTIALOFTHECHINESEECONOMYSEEMS REDUCED. SEABORNE TRADE VOLUMES INCREASED BY 2.7% IN 2013 Globalgrowthpickedupinthesecondhalfof2013,averaging 3.6%anotableuptickfromthe2.6%duringthepreceding sixmonths.AccordingtotheIMF,thestronger-than-expected acceleration in global activity in the latter part of 2013 was part-lydrivenbyshort-termincreasesininventories.Thereinforced activitywasinstantlymirroredinglobaltradevolumes.Sea-bornetradegrowthalmostdoubledinthesecondhalfof2013, averaging3.6%anothernoteworthyuptickfromthe1.8% duringtheprecedingsixmonths.Onaverage,seabornetrade volumes grew by 2.7% in 2013. GLOBAL GROWTH IS STRENGTHENINGGlobalgrowthisprojectedtostrengthenfrom3%in2013to 3.6%in2014and3.9%in2015,accordingtotheIMF.Inad-vancedeconomies,growthisexpectedtoincreasetoabout 2.2% in 2014-15, an improvement of about 1 percentage point compared with 2013. With supportive monetary conditions and a smaller drag from fiscal consolidation, annual growth is project-edtoriseabovetrendintheUnitedStatesandtobecloseto trend in the core euroarea economies.In Japan, fiscal consoli-dationin201415isprojectedtoresultinsomegrowthmod-eration.Emergingmarketeconomiescontinuetocontribute more than two-thirds of global growth. In emerging markets and developingeconomies,growthisexpectedtopickupgradually from4.7%in2013toabout5%in2014and5.2%in2015. Growth will be supported by stronger external demand from ad-vancedeconomies.InChina,growthisprojectedtoremainat about 7.5% in 2014 as the authorities seek to rein in credit and advancereformswhileensuringagradualtransitiontoamore balancedandsustainablegrowthpath.Seaborneworldtrade volumes are expected to increase by 3.8% in 2014 and by 3.6% in 2015. It should be emphasised that, despite improved growth prospects,theglobalrecoveryisstillfragileandsignificant downside risks, including geopolitical risks, remain. DEMOGRAPHIC CHANGES MAKE REFORMS EVER MORE URGENT InthiseditionwetakeacloserlookattheChineseeconomy. Impendingdemographicchangesmakereformsevermoreur-gent.Wemaintaintheviewwehavehadsince2006:thatthe timing and characteristics of the rebalancing exercise remain the cornerstoneofouroutlookfortheglobaleconomyingeneral and the shipping industry in particular. China is on the cusp of a demographicshiftthatwillhaveprofoundconsequencesforits economic landscape. Within a few years the working-age popu-lation will reach a historical peak, and will then begin a precipi-tousdecline.Thecoreoftheworking-agepopulation,those aged2039years,hasalreadybeguntoshrink.Asthishap-pens,thevastsupplyoflow-costworkersacoreengineof Chinasgrowthmodelwilldissipate,withpotentiallyfar-reaching domestic and external implications. Danish Ship Finance (Danmarks Skibskredit A/S) Shipping Market Review - May 20144CHINA IS THE KEY DRIVER OF GLOBAL SEABORNE DEMAND China has retained its role as akey driver of global growth de-spiteweakexternaldemand.Today,theoutlookformostship-pingsegmentsisheavilydependentonfutureChinesedemand as major exporters of commodities, parts and components have beensendinganincreasinglylargerfractionoftheirexportsto Chinaduringthecourseofthedecade.Thischangeintrade flows reflects, tosomeextent, the fact that supply chains have more frequently been routed through China for the final stage of assembly. Therefore, the vulnerability of todays global macroe-conomicenvironmentandtheglobalshippingmarketsstems from the imbalanced global economic growth in general and the dependence on China in particular. CAN CHINA CONTINUE TO GROW DESPITE WEAK EXTERNAL DEMAND? Chinascontinuedrelianceoninvestmentsasthesinglemost important contributor to its GDP creation has raised the question ofwhetheritscurrentgrowthmodelissustainableinanenvi-ronmentwithweakdomesticandexternaldemand.Thehigh Chinese rate of investment has been a significant contributor to growthinseabornedemandoverthelastfewdecades.Butto-day,thecostofgeneratingdollargrowthinChinahasbecome very high. Chinese imports have become more closely linked to commodities and minerals, for which supply is relatively inelastic andglobalpriceshavebeenrising.Atthesametime,Chinese exports have become increasingly tilted towards machinery and equipment,forwhichsupplyisrelativelyelastic,competitionis significant and relative prices have been falling. Consequently, it seemsappropriatetoaskhowlongChinacansustainsucha high rate of investment. DOMESTIC IMBALANCES ADVANCE AS EXTERNAL ONES RETREAT Therisksofpersistentovercapacity,deflationarypressureand large financial losses havecontinued to build since 2008, as is-suesrelatedtoover-investmenthavecausedproblemsofun-derutilisedcapacityinseveralkeysectorsoftheChineseecon-omy.Infact,theaveragecapacityutilisationinkeyindustries suchassteel,cement,automobilesandshipbuildingdeclined from just below 80% before the crisis to about 60% in 2013. Inother words, domestic imbalances seem to be on the rise just as external imbalances appear to be receding. SOFT LANDINGThelikelihoodofahardlandinginChinaafterover-investment and a credit boom continues to be small, because the authorities should be in a position to limit the damage from large-scale as-setqualityproblemswithpolicyintervention.However,credit continuestoriserapidly.Risksassociatedwithassetquality-relatedbalancesheetproblemsinthefinancialsectorarethus accumulating. THE REBALANCING PROCESS COULD BE ACCELERATED PREMATURELY Weareallpainfullyawareofthemacroeconomicconsequences of the global financial crisis. But it would be a mistake to expect similar consequences in China in the event that the Chinese au-thorities need to recapitalise major partsof the banking sector.It should be kept in mind that, less than ten years ago, the Chi-nese authorities restructured the four largest state-owned banks through aclean-upofnon-performing loansandthrough public capital injections. The negative spill-over effects from the recap-italisationappearedtobefarlessdamagingforChinasgrowth potentialthanformanyoftheadvancedeconomiesafterthe global financial crisis. However, that is not to say that a poten-tial recapitalisation of major Chinese banks will come at no cost toGDPcreation.ThepointisthatChinaseemspositionedto limitthedamageifnecessary.Thetrueriskassociatedwitha potential recapitalisation of the Chinese banking sector is that it may prematurely accelerate the rebalancing process. SPILL-OVER EFFECTS TO COMMODITY EXPORTERSBasically,therebalancingexerciseisaboutswitchingChinas growthmodelawayfrominvestmentandmoretowardsprivate consumption. Lower investments may eventually reduce Chinese commodityconsumption,whichmayinturnlowercommodity prices, including oil prices. Lower commodity prices hold the po-tentialtocreateadversespill-overeffectsforcommodityex-porters.Hence,thespill-overeffectsfromaninvestmentslow-downinChinacouldsignificantly lowerthegrowthpotentialfor Chinas major trading partners. These spill-over effects are Danish Ship Finance (Danmarks Skibskredit A/S) Shipping Market Review - May 20145expected to be important for the global macroeconomic outlook. Sinceemergingmarketeconomiesplayagrowingroleinthe globaleconomy,theseverityofadownturnwillonlybeexag-gerated.Duringthepasthalfcentury,emergingmarketecono-mieshavemovedfrombeingperipheralplayerstosystemically important trade and financial centers. In todays global econom-iclandscape,economiclinksamongadvancedandemerging marketeconomiesarestrong.Economicactivityinadvanced economiesisexposedtolowereconomicactivityinemerging market economies. CHINA IS ON THE BRINK OF A TRANSITION TheChinesegovernmentisawareoftheserisksandenvisages in its 12th Five-Year Plan a set of reforms to rebalance economic growth away from exports and investment towards private con-sumption.Andwearebeginningtoseechanges.Recently,we haveseenshiftsinthecompositionofChinascommoditycon-sumptionthatareconsistentwithearlysignsofdomesticde-mandrebalancing.Privateconsumptionhasstartedtopickup, while infrastructure investment has slowed. Chinese commodity consumptionhasbeenrisingand ispredicted tocontinuetodo so,butataslowerpaceforlow-gradecommodities(e.g.iron oreandcoal)andatanacceleratingpaceforhigher-grade commodities(e.g.aluminium,tinandzinc).Specifically,within primary energy, the growth rate of natural gas consumption has risen faster than that of other fuels (e.g. coal). PUTTING IT ALL TOGETHER China faces considerable domestic and international pressure to rebalanceitsexportandinvestment-orientedeconomytowards a more consumption-based one, with a greater share of growth comingfromprivateconsumptionandtheservicesector.But thestakesofthedomesticrebalancingarehighforChinaand fortheworldeconomy.In2011,Chinaofferedaglimpseofits potentialtoactasanengineforfinaldemandwhenitbecame the single largest contributor to global consumption growth. Ra-therthanbeingaresultofanappreciableincreaseinChinas household consumption as a share of the national economy, the sharp rise in global consumption was the result of Chinas over- all economy growing much faster than other economies. LOWER GROWTH POTENTIAL FOR SEABORNE TRADE VOLUMES AsuccessfulrebalancingoftheChineseeconomywillarguably makeChinasgrowthmodelbothmorestableandsustainable and it will most likely improve the medium-term global econom-icprospects.Whilethismaybegoodnewsfromamacroeco-nomic perspective, it may be less positive for the growth poten-tialofChineseseaborneimportvolumesingeneralandofChi-nesedrybulkdemandinparticular.Chinesedrybulkimport volumes could reach their short-term maximum potential within the next few years. Danish Ship Finance (Danmarks Skibskredit A/S) Shipping Market Review - May 20146 SHIPPING MARKETS AT A GLANCE WEARGUETHATONLY83%OFTHEWORLDFLEETISCUR-RENTLY IN DEMAND AFTER ADJUSTING FOR SPEED AND TRAV-ELDISTANCES.FREIGHTRATESANDASSETVALUESREMAIN LOW AND VESSELS ARE BEING SCRAPPED PREMATURELY.SUPPLY CONTINUES TO OUTPACE DEMAND Seabornetradevolumesincreasedby2.8%in2013(fig.1), whiletheworldfleetgrewby3.7%.Evenso,thereismuchto indicatethattheeffectivebalancebetweensupplyanddemand improved during the year. Effective seaborne demand is not on-ly determined by import volumes, but also by the travel distanc-esbetweensuppliers,consumersandinventories.Weestimate that travel distances, trade imbalances, slow steaming and gen-eral market inefficiencies slightly improved the balance between supplyanddemandbyapproximately1percentagepointin 2013. FREIGHT RATE INDEX ALMOST DOUBLED IN 2013 Thecompositefreightrateindex,theClarkSeaIndex,almost doubledduring2013,endingtheyearatUSD16,500perday. However,theindexfellbackbelowUSD12,000perdayduring the first few months of 2014. The average secondhand price in-deximprovedby12%betweenJune2013andMarch2014. Still,weshouldputthisintoperspective:freightratescame down70%from2008to2013,whilesecondhandvaluesde-clined by 40% in the same period (fig. 2). OPTIMISM DRIVEN BY SENTIMENT RATHER THAN FUNDAMENTALS Several of the major shipping segments have benefited from the improvedbalancebetweensupplyanddemand.Inparticular, crudetankersanddrybulkwitnessedanunexpectedrallyin freightratesduringthesecondhalfof2013.Thisledtoopti-mismthatovercapacityissuesarenotasalarmingasmany havefeared.Weacknowledgetheimprovedmarketbalancein severalsegmentsandasituationwhereshort-termspikescan emergeinamarketwithsevereovercapacity.However,were-jecttheideathatthesetemporaryspikes,drivenbyregional imbalancesandinventorychanges,verifythatthemarketbal- Figure GRO.1 Figure GRO.2 80100120140801001201402005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015Index (2005 = 100)Index (2005 = 100)Sources: Reuters EcoWin, Danish Ship FinanceSeaborne trade volumes rose by 2.8% in 2013World Trade Volume Annual averageDanish Ship Finance (Danmarks Skibskredit A/S) Shipping Market Review - May 20147ance between supply and demand is about to be re-established. Sinceshort-termsupplyisrelativelyinflexible,anychangein demandisexpectedtoimpactfreightrates.Ifdemandunex-pectedlyincreasesinanundersuppliedregion,freightrateswill spike until demand is met by sufficient supply. ONLY 83% OF THE WORLD FLEET IS CURRENTLY IN DEMAND Thelowlevelsoffreightratesandassetvaluesclearlyempha-sisethatthecurrentmarketisoversupplied.Infact,theworld fleetincreasedby44%between2008and2013(fig.3),while seabornetradevolumesonlyincreasedby18%.Thesefigures indicateanominalgapbetweensupplyanddemandabove25 percentagepoints,whileweestimatethecurrenteffectiveout-putgaptobecloserto17%.Nevertheless,itisimportantto remember that some segments maintain a reasonably good bal-ancebetweensupplyanddemand.Thesesegmentsareinpar-ticulargascarriers,offshoresupplyvesselsandsomeofthe smaller niche markets (e.g. car carriers). 45 MILLION DWT SCRAPPED DURING 2013 Thecombinationoflowfreightratesandhighscrappingprices continuestosupportahigh levelofdemolitionactivity.45mil-liondwtwasscrappedduring2013.Afterfiveyearsofhigh demolitionactivity,manyoftheobviouscandidateshaveal-readybeenscrapped.Today,lessthan5%oftheworldfleet is older than 25 years (fig. 4). Accordingly, the average demolition age continues to decline. So far in 2014, the average scrapping age has dropped to 27 (fig. 5). THE COST OF OVER-ORDERING COULD BE A SHORT OPERATING LIFE Theaveragescrappingagebecomesanissueifvesselsare scrappedbeforetheyreachtheageoftheirexpectedtechnical operatinglife.Standardvesselsareexpectedtooperateuntil theageof25years,whilespecialisedvesselsareexpectedto tradeuntiltheageof30years.Ifavesselisscrappedprema-turely,itsimplyhasfeweryearstogeneratetheexpectedin-come. Consequently, in segments where few old vessels remain, the cost ofover-ordering could be a significant reduction in the remaining operating life of older vessels. Figure GRO.3 Figure GRO.4 -100-50050100150200-100-500501001502002005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Million dwtMillion dwtSources: Clarksons, Danish Ship FinanceThe world fleet increased by 44% between 2008 and 2013Delivery Scrapping36%19%12%8%4%5%18%0%10%20%30%40%02004006008000-5 5-10 10-15 15-20 20-25 25+ Orderbook% of world fleetMillion dwtSources: Clarksons, Danish Ship FinanceThe world fleet is becoming increasingly youngOnly 9% of the world fleet is older than 20 yearsDry Bulk Tanker Container Other % of fleet% of world fleet >>Danish Ship Finance (Danmarks Skibskredit A/S) Shipping Market Review - May 20148A MASSIVE 150 MILLION DWT ORDERED DURING 2013 Therisingbuthistoricallylownewbuildingpricesseemto haveconvincedmanyinvestorsthat2013and2014arethe righttimetoinvest.Morethan150milliondwtwascontracted during2013.Clearly,werecognisethatindividualinvestments mayseemappropriate,butfromanindustryperspective,such ordering activity is worrying in an already oversupplied market. The problem is that almost noshipping segments have the age profiletoabsorbtheorderbookbymeansofregularfleetre-placement (i.e. scrapping) and annual demand growth. The cur-rentorderbook-to-fleetratiostandsat18%,whilelessthan 10%oftheworldfleetis20yearsorolder.Itthereforeseems inevitablethatyoungervesselswillbecomescrappingcandi-dates. STRUCTURAL ISSUES ARE DEPRESSING THE VALUE OF OLDER VESSELS Theshippingmarketswillbecomemorefragmented.Whilein-vestors,andtraditionalshipowners,thathavecontractednew vesselsareexpectingtotakeadvantageoflow-pricedvessels, compliantwithtomorrowsstandardstoday,withpresumably lowerfuelconsumption,ownerswithanexistingfleetareex-posed to the risk of overcapacity through both premature scrap-pingandlowfreightrates.Inseveralsub-segments,theaver-ageageofvesselsscrappedin2013wasbelowtheexpected operatinglife.Forinstance,inthecaseofVLCCs,theaverage age of vessels scrapped was 18 years. This implies that the val-ue of older vessels was reduced by the net present value of sev-enyearsofcashflows,comparedwithascenariowhereVLCCs were scrapped at the age of 25 years or older. This trend is evi-dent in several sub-segments and is expected to intensify during the next few years. Figure GRO.5 Figure GRO.6 270102030400153045602005 2006 2007 2008 2009 2010 2011 2012 2013 2014Average age of scrapped vesselsAnnual demolition volume (by age)Million dwtSources: Clarksons, Danish Ship Finance45 million dwt scrapped in 2013The average scrapping age continues to declineBelow 20 years old 20-25 years old 25-30 years old 30+ years oldChemical TankerContainerCrude TankerDry Bulk LNGLPGOffshoreOtherProduct TankerRo-Ro-202460% 5% 10% 15% 20% 25% 30% 35% 40%Fleet renewal(Orderbook / fleet (20yr+) dwt)Sources: Clarksons, Danish Ship FinanceNot all segments are equally exposed to future overcapacityOrderbook / fleetDanish Ship Finance (Danmarks Skibskredit A/S) Shipping Market Review - May 20149OUTLOOK THEROADTORECOVERYISEXPECTEDTOBELONGAND BUMPY,SINCETHECOSTOFTHERECENTOVER-ORDERING COULD TURN OUT TO BE MORE DAMAGING THAN TEMPORARILY LOWER FREIGHT RATES IN AN OVERSUPPLIED MARKET. WE EX-PECTPREMATURESCRAPPINGTOBETHENEWNORMUNTIL BALANCEBETWEENSUPPLYANDDEMANDHASBEENRE-ESTABLISHED.INVESTORSPLAYINGASHORT-TERMASSET GAMECOULDBETRAPPEDBYTHEREDUCEDOPERATINGLIFE, AS A SHORTER CASH FLOW PERIOD COULD LOWER THE VALUE OFTHEIRINVESTMENT.INVESTORS,OWNERSANDTHEIR BANKSMAYFACEUNEXPECTEDVALUEDEPRECIATIONSEVEN ONRELATIVELYYOUNGVESSELSINTHEPERIODOFTRANSI-TION. Buying low and selling high has always been the recipe for good investments.Intodaysshippingmarkets,investorsandtradi-tional ship owners are taking advantage of historically low prices topurchasebothnewshipsandsecondhandvessels.Theirin-vestmentstrategyvariesbut,asweknow,manyroadsleadto Rome. Some are investing in fuel-efficient newbuildings, compli-ant with tomorrows standards today, while others are choosing to buy and maybe retrofit older vessels. Owners with a portfolio of expensive and highly leveraged vessels are struggling to find opportunities.Shippingisnotateamsportandneverwillbe, but everyone is vulnerable to unexpected value depreciations. Above, we have argued that only 83% of the world fleet is cur-rently in demand after adjusting for speed and travel distances. Andmorevesselsareyettoenterthemarket.Withlessthan 10%ofthefleetolderthan20yearsandanorderbook-to-fleet ratioof18%,theworldfleetispoorlypositionedtoabsorbthe incomingcapacitythroughordinaryfleetreplacements.Weex-pectprematurescrappingtobethenewnormuntilanewbal-ance between supply and demand has been re-established. The value implication of premature scrapping could easily turn out to be a shorter cash-flow period. If this turns out to be reflected in the valuation of the vessels, secondhand prices for older vessels could be subject to unexpected depreciations. Figure GRO.7 Figure GRO.8 2329 2927106 7 61433284359474622212532020406080020406080Million dwtMillion dwtSources: Clarksons, Danish Ship FinanceFuture scrapping activity in line with past experienceBut vessels are expected to be scrapped prematurelyHistorical scrapping Potential scrapping candidates272123222324192225283119222528312008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018Scrapping ageScrapping agePanamax vessels could be scrapped at the age of 21 years in 2014Average age of vessel scrapped, Panamax (Dry Bulk) Sources: Clarksons, Danish Ship FinanceDanish Ship Finance (Danmarks Skibskredit A/S) Shipping Market Review - May 2014105% FLEET GROWTH IN 2014 AND 2015 We project that the high level of scrapping activity seen in 2013 will continue in 2014. A total of 46 million dwt is expected to be demolishedduringtheyear(fig.7).Inourfleetprojectionswe applyascrappingscenariowherevesselsbecomescrapping candidates immediately before they are due for a special survey (beginning from the third special survey for some standard ves-selsbutmorecommonlyfromthefourthspecialsurvey).Con-sequently,thehighscrappingactivitycomesatthecostof younger vessels being scrapped prematurely, as most segments havealreadyscrappedtheiroldestvessels.In2015,scrapping activity is expected to halve, but the operating life of vessels is expectedtoremainshortened.Theworldfleetisexpectedto increase by 5% annually in 2014 and 2015. THE SUPPLY SURPLUS COULD WIDEN FURTHER Thesupplysurplus is likelytowidenfurtherin2014and2015, asseabornetradevolumesareexpectedtogrowlessthan4% in 2014 and 2015. However, if allowing for extensive postpone-mentsandcancellations,thegrowthfigureoftheworldfleet coulddropbelow4%annually.Beforedrawingthecomforting conclusionthatthesupplysurplusisabouttonarrowandthe shipping industry is about to recover, we should look at the un-derlyingfigures.Supplyanddemandhavedevelopedatdiffer-entpacesoverthelastfiveyears,growing44%and18%re-spectively. Hence, in todays shipping markets, a 1% increase in the world fleets cargo-carrying capacitywill not be absorbed by a1%increaseinworldtradevolumes,butmorelikelybya 1.3% increase. FREIGHT RATES WILL REMAIN LOW IN 2014 AND 2015 Accordingly, the cargo-carrying capacity of the world fleet is ex-pectedtoincreasefasterthanseabornedemandvolumesin 2014and2015.Initself,thisimpliesthatfreightrateswillre-mainlow.Ontheotherhand,inthepast,wehaveseenthat longertraveldistances,lowerspeedsandlowerfleetefficiency (drivenbythegrowingglobalimbalancesandhencemorebal-lastingtime)havesupportedthesupplyanddemandbalance significantly. The importance of these factors should not be un- derestimated.Weshouldremember,though,thatalthough theyhavesupportedfreightratesinthepast,andpotentially will continue to do so in 2014 and 2015, they could easily con-tribute lessif,forexample,Chinaacceleratesitseffortstore-balance its economy. SHIP VALUE FORMATION Secondhandvaluesaretraditionallydrivenbythreeparame-ters: short-term earnings, the long-term earnings potential and the expected operating life of a vessel. The short-term earnings arecloselyconnectedtofreightrates,whileintheorythe long-termearningspotentialisrelatedtothenewbuilding price.Theoperatinglifeofthevesselisassumedtobean-choredtothetechnicallifetimeofthevessel,althoughthe demolitionageofindividualvesselsvariesgreatlyacrosscy-cles. In times when vessels are scrapped prematurely, a short-er operating life has a significant negative impact on older ves-selssecondhandvalues.Weexpectthismechanismtodomi-nate the value formation for older vessels in the years to come. A SHORTER OPERATING LIFE ABSORBS FREIGHT RATE INCREASES We illustrate the strength of these dynamics with an example. LetuslookatPanamaxbulkcarriers.In2013,theaverage Panamax bulk carrier was scrapped at the age of 27 years. Due totheageprofileofthefleetandthenatureofourscrapping scenario, the average scrapping age for Panamax bulk carriers coulddropto21yearsin2014(fig.8).Ifthisturnsouttobe reflected in the valuation of the vessels, secondhand prices for oldervesselscouldbesubjecttounexpectedandpotentially steepdepreciations.Potentially,theirvaluecouldbereduced byasmuchasthenetpresentvalueoffouryearsofincome. Consequently,eveninascenariowheredemandgrowthmore thancounterbalancessupplygrowth,significantfreightrate increasesarerequiredforsecondhandvaluestoremainunaf-fected by the shorter operating life. SHIP VALUES DECOUPLED FROM EARNINGS Ships are not always priced based on earnings. In todays mar-kets, where new professional investors, in particular within the Danish Ship Finance (Danmarks Skibskredit A/S) Shipping Market Review - May 201411tankersegments,areplayingashort-termassetgame,ship values seem to have decoupled from earnings. This clearly rep-resentsarisk,asitwouldbeamistaketointerprettheprice increases as confirmation that the underlying market fundamen-talshavealreadyimproved.Tous,thepriceincreasessimply reflectthefactthatalotofinvestorsarecurrentlybuyinginto theideaofanewandgreenerstandardforshipsattheex-penseofoldervesselsvalue.Themarkethasbecomemore fragmented. NEWBUILDING PRICES MAY DECLINE The global yard industry is in a consolidation process where in-efficient yards are closing and capacity is gradually adjusting to lower future demand. Newbuilding prices have been on a struc-turaldeclineduringthelastfiveyearsandareexpectedtore-mainlowuntiltheconsolidationprocesshascometoanend. Butthesurprisinglyhighcontractingactivityduring2013has enablednewbuildingpricestobeincreasedatyardsthathave attractedneworders.Theseyardsrepresent84%oftheglobal yardcapacityin2013.The12%increaseinnewbuildingprices hascontributedtoahigherassessmentofyoungervessels long-termearningspotential.Butdoesthisincreasereflecta short-termassetbubblewhichisexpectedtorunoutofsteam almost before theordered vessels are delivered? We believe so andassertthattodaysshippingmarketremainsexcessively suppliedbythecurrentfleetandthevesselsonorderinthe foreseeable future. In fact, we expect to see declining newbuild-ingpricesmaybeassoonas2015forlesssophisticatedves-sels. A LONG AND BUMPY ROAD TO RECOVERY The road to recovery is expected to be long and bumpy. Clearly, theshippingmarketswilleventuallybalanceandvesselswill once again be both traded and valued based on an operating life of25years(30yearsforspecialisedvessels).Butuntilthen, investors,ownersandtheirbanksmayfaceunexpectedvalue depreciationsevenonrelativelyyoungvessels.Agreatdegree ofuncertaintypersists,astheglobaleconomyingeneraland shipping in particular have become increasingly dependent on China.Thegreatesthindrancetorecoverybyfarwouldbean acceleration of the Chinese rebalancing process. That said, con-tinuedover-ordering,higherspeedsandinadequatescrapping activityalsohavethepotentialtosignificantlyjeopardiseand postpone the recovery. Danish Ship Finance (Danmarks Skibskredit A/S) Shipping Market Review - May 201412SHIPBUILDING SHIPPING MARKET REVIEW MAY 2014 SHIPBUILDING THE GLOBAL YARD INDUSTRY CONTINUES ITS CONSOLIDATION PROCESS, WITH INEFFICIENT YARDS GOING OUT OF BUSINESS ANDTHEINDUSTRYGRADUALLYADJUSTINGTOLOWERFU-TUREDEMAND.YET,THESURPRISINGLYHIGHCONTRACTING ACTIVITYIN2013ENABLEDNEWBUILDINGPRICESTORISE. HOWEVER, WE DO NOT EXPECT THESE INCREASES TO BE SUS-TAINABLEANDPREDICTADECLINEINPRICESDURING2015 OR 2016. NEWBUILDING PRICES INCONTRASTTOOURINITIALEXPECTATIONSFOR2013,THE AVERAGE NEWBUILDING PRICE IS CURRENTLY 12% ABOVE THE LOW OF MARCH 2013, SUPPORTED BY A SIX-MONTH INCREASE IN THE GLOBAL ORDER COVER TO 24 MONTHS. GLOBAL ORDER COVER GREW BY 19% IN 2013 Inpreviousyears,theglobalordercoverhasgraduallyshort-ened.Sincelate2008 thecombinationofexcessiveglobalyard capacityandinsufficientdemandfornewvesselsfromalready oversupplied shipping markets has put pressure on newbuilding prices. Consequently, yard margins have shrunk and since 2012 theglobalyardindustryhasundergoneagradualadjustment process, reflecting the lower demand. But, to our surprise, glob-alordercoverincreasedduring2013andthefirstquarterof 2014, driven by the high contracting activity in some segments. NEWBUILDING PRICES CURRENTLY 12% ABOVE THE LOW OF 2013 Theglobalyardindustryhasbecomemorefragmented.Partof the industry is about to go out of business, while another part is strengthening its position. For the viable part of the shipbuilding industry,ordercoverhasincreasedfrom18monthsto24 months during the past 15 months. Still, order cover varies sig-nificantlyacrossbuilderregionsandamongyards(fig.2).The newbuilding price to a certain extent mirrors the order cover. In March2013,theaveragenewbuildingpricereachedaten-year low of USD 1,730 per cgt, but climbed to USD 1,852 per cgt at theendoftheyear.InMarch2014,theaveragenewbuilding price was 12% above the low of March 2013 (fig. 1). Figure SB.1 Figure SB.2 0.001.252.503.755.005001,2502,0002,7503,5002005 2006 2007 2008 2009 2010 2011 2012 2013 2014Years of order coverUSD per cgtAverage newbuilding price 12% above the low of 2013Global order cover increased by 19% during 2013>Sources: Clarksons, Danish Ship Finance * Global order cover = Orderbook / yard capacityMarch 2013:USD 1,730 per cgtMarch 2014:USD 1,945 per cgt2.0 years2.1 years1.9 years1.401.601.802.02.202012 2013 2013 2013 2013 2014Years of order coverSources: Clarksons, Danish Ship FinanceRoughly two years' order cover in major builder regionsChinese shipyards' order cover increased by 25% in 2013China South Korea JapanDanish Ship Finance (Danmarks Skibskredit A/S) Shipping Market Review - May 201413GLOBAL CONTRACTING CONTRACTING MORE THAN DOUBLED FROM 2012 TO 2013, AS 53 MILLION CGT WAS CONTRACTED DURING THE YEAR. In2013,contractingactivitywentthroughtheroof,although most shipping segments already seemed amply supplied for the future. In total, more than 53 million cgt was contracted in 2013 (fig.3).Thecombinationoftighterenvironmentalregulations (i.e. the revised MARPOL annex VI) and the low but rising new-buildingpricehaspresumablybeenbehindinvestorssudden appetite for new vessels. GLOBAL CONTRACTING MORE THAN DOUBLED IN 2013 Despitethemassivecontractingactivity,theselectionprocess shaping the viable part of the shipbuilding industry continues. Of alltheyardsbuildingnewvesselsin2013,lessthanhalfof themreceivednewordersduring2013orthefirstquarterof 2014.Thecombinedcapacityofthelatterconstitutes84%of theestimated2013globalyardcapacity.Thismeansthat16% oftheglobalyardcapacitywasnotindemandthroughoutthe last 15 months. CHINA SEEMS TO BE STUCK WITH DRY BULK CONTRACTS Chinese yards managed to attract new orders of almost 22 mil-lion cgt in 2013, which was in line with the estimated 2013 yard capacity.Butlessthanhalfofthe200yardsbuildingnewves-selsin2013receivednewordersduringthe15-monthperiod. Morethanhalfoftheordersweredrybulkorders(fig.4).Fu-turecapacityreductionsoraclimbupthecomplexityladder seem to be a prerequisite for the future success of Chinas ship-building industry. SOUTH KOREA RECEIVED ORDERS OF 17 MILLION CGT SouthKorearemainsthemostsophisticatedbuilderregionin Asia.In2013,SouthKoreanyardsreceivednewordersof17 millioncgt,widelydiversifiedamongthemorehigh-specseg-ments(fig.4).SouthKoreanyardsbuiltprimarilyfornon-domestic owners. Figure SB.3 Figure SB.4 012345 - 20 40 60 80 1002005 2006 2007 2008 2009 2010 2011 2012 2013 2014Years of order cover / delivery timeMillion cgtSlightly more than 53 million cgt contracted in 201311 million cgt contracted in the first quarter of 2014South Korea China Japan Europe Rest of the worldSources: Clarksons, Danish Ship Finance * Global order cover = orderbook / yard capacityGlobal order cover >>06121824China South Korea JapanMillion cgtSources: Clarksons, Danish Ship Finance2013 contracting: South Korean yards remain the most diversified and hence best positioned for the futureDry Bulk Tanker Gas Container Offshore OtherDanish Ship Finance (Danmarks Skibskredit A/S) Shipping Market Review - May 201414GLOBAL DELIVERIES THEGLOBALSHIPBUILDINGINDUSTRYSUFFEREDANOTHER TOUGH YEARIN 2013.DESPITE A SIZEABLEORDERBOOK, AN-NUALDELIVERIESDROPPEDBY22%TO38MILLIONCGTAS ONE OUT OF FOUR ORDERS WAS POSTPONED TO 2014 OR LAT-ER.38 MILLION CGT DELIVERED IN 2013 While 56 million cgt was scheduled for delivery in 2013, only 38 million cgt was actually delivered during the year (fig. 5). Of the outstanding 18 million cgt, weestimate that 15 million cgt was postponed to 2014 or later (fig. 6). The remaining 3 million cgt (i.e.5%)initiallyonorderfordeliveryin2013isthoughtto havebeencancelledoutright.Thisbasicallymeansthatevery fourth vessel scheduled for delivery in 2013 was postponed. CHINA DELIVERED ONLY 58% OF SCHEDULED DELIVERIES IN 2013 LastyearwasabloodyonefortheChineseshipbuildingindus-try. Considerable restructuring activity and tightened credit lines for the industry led to order cancellations and delays in deliver-ies. A total of 23 million cgt was scheduled for delivery, but only alittlemorethan13millioncgtwasactuallydeliveredduring the year. Almost 9 million cgt was postponed, while just over 1 millioncgtisconsideredcancelled.Halfofthe10millionnon-deliveredcgtshouldhavebeenaddedtothedrybulkfleet.In total, Chinese output was down by 34% from 2012 to 2013. SOUTH KOREAN OUTPUT ALMOST EQUALLED CHINESE OUTPUT South Korean yards maintained a high delivery performance. As muchas81%ofallordersscheduledfordeliveryin2013were actually delivered. While 15 million cgt was scheduled, 12.5 mil-lion cgt was actually delivered. The remaining orders were post-ponedtoalaterdeliverydate.Noordersappeartohavebeen cancelled in 2013. Figure SB.5 Figure SB.6 171228463112131327358%81%74%73%50% - 5 10 15 20 25China South Korea Europe Japan Rest of theworldMillion cgt38 million cgt delivered in 2013South Korean deliveries almost equalled Chinese outputFirm orders Purchase options Actual deliveries Sources: Clarksons, Danish Ship FinanceDelivery performance10251026167233%30%32%33%0%10%20%30%40%50%0510152025Tanker Bulk Container GasPostponements as % of expected deliveriesDeliveriesMillion cgtIn 2013, 15 million cgt was postponed to 2014 or laterAnother 3 million cgt was cancelledExpected deliveries Actual deliveriesPostponements ratio Sources: Clarksons, Danish Ship FinanceDanish Ship Finance (Danmarks Skibskredit A/S) Shipping Market Review - May 201415YARD CAPACITY AND UTILISATION GLOBALYARDCAPACITYWASREDUCEDBYMORETHAN10% (7MILLIONCGT)IN2013.CHINESEYARDCAPACITYSHRANK BY11%ANDHENCECONSTITUTED42%OFTHEGLOBALRE-DUCTION IN CAPACITY.GLOBAL YARD CAPACITY AND YARD UTILISATION DOWN IN 2013 Theconsolidationprocessoftheglobalyardindustrycontinued during 2013. We estimate that global yard capacity was reduced from64millioncgtin2012to57millioncgtin2013(fig.7). Global yard capacity is now back at a level that resembles 2009. Nonetheless, global yard utilisation decreased by 11 percentage points to 66%, as the extensive postponements of 15 million cgt causedannualdeliveriestodropby22%to38millioncgt(fig. 7). CHINA IS SUFFERING FROM PAST YEARS CAPACITY EXPANSION Inrecentyears,Chineseyardcapacityexpansionhasoutpaced demand.WeestimatethatChineseyardcapacitywasreduced by 2.8 million cgt (11%) to 22 million cgt in 2013 (fig. 8). Still, Chinese yard utilisation dropped from 80% to 60% from 2012 to 2013.TheChinesecapacityreductionrepresented42%ofthe globalreductionincapacity.Itis,however,importanttore-memberthattheChineseyardindustryremainshighlyfrag-mentedintermsofyardsizeandbuildingcapability.Thus,the capacityadjustmentsreflectaselectionprocesswherebyineffi-cient yards go out of business. LARGE YARDS PULL THE LOAD IN SOUTH KOREA SouthKoreanyardshavemaintainedfairlystablecapacityand operate at a utilisation rate around 80%. Only 3% (600,000 cgt) of South Koreas yard capacity turned idle during 2013 (fig. 8.), and the region now has aggregate yard capacity of 16.7 million cgt.Theindustryisbecomingincreasinglyconsolidated.Eight large yards currently constitute 92% of total South Korean yard capacity. Figure SB.7 Figure SB.8 51606374665746485553493892%86% 86%82%77%66%0%25%50%75%100% - 25 50 75 1002008 2009 2010 2011 2012 2013Global year utilisationMillion cgtGlobal shipyard utilisation at 66% in 2013Chinese yard utilisation down from 80% to 59%Capacity Scheduled deliveries Actual deliveryGlobal yard utilisation >>Sources: Clarksons, Danish Ship Finance-11%-3%-14%-17% -17%-30%-23%-15%-8%0%-3.00-2.25-1.50-0.750.00China South Korea Japan Europe Rest of theworldRegional capacity reductionMillion cgtSources: Clarksons, Danish Ship FinanceGlobal yard capacity declined by 11% from 2012 to 2013South Korean yard capacity remains fairly stable2013 capacity reduction by builder region % of 2012 capacityDanish Ship Finance (Danmarks Skibskredit A/S) Shipping Market Review - May 201416OUTLOOK THESHIPBUILDINGINDUSTRYWILLCONTINUEITSCONSOLI-DATION PROCESS IN THE YEARS TO COME, AS SEVERAL YARDS WILLGOOUTOFBUSINESS.NONETHELESS,WEARGUETHAT THENEWBUILDINGPRICEMAYDECLINEINSOMESEGMENTS IN 2015 OR 2016. Theglobalyardindustryisinaconsolidationprocesswhereby inefficientyardsareclosingandcapacityisgraduallyadjusting to lower future demand. By 2016, we expect global yard capaci-tytohavereturnedtothe2008levels.ButChineseandSouth Koreanyardsareexpectedtoaccountfor73%ofglobalyard capacity, in contrast to 54% in 2008. NEWBUILDING PRICES ON A STRUCTURAL DECLINE Newbuilding prices have been on a structural decline during the last five years and are expected to remain low until the consoli-dationprocesshascometoanend.Still,thesurprisinglyhigh contracting activity during 2013 has enabled newbuilding prices tobeincreasedatyardsthathaveattractedneworders.Note thatonlyyardsreceivingnewordersarepartoftheprocessof determiningprices.Accordingly,theincreaseinnewbuilding prices should not be interpreted as evidence of a market in bal-ance.Itsimplyreflectstheongoingselectionprocesswhereby inefficient yards go out of business and sustainable yards attract new orders. 2014 CAPACITY DOWN BY 9% TO 52 MILLION CGT Morethan550yardsbuiltthecapacitydeliveredduring2013, butfewerthan250receivednewordersduring2013andthe firstquarterof2014.Thelatterrepresented84%oftheglobal yard capacity in 2013. Consequently, yards representing 16% of the global yard capacity (i.e. 9 million cgt) were not able to at-tractasingleneworderoveraperiodof15months.These yards were operated at a utilisation rate below 60% in 2013 and have an averageordercoverof less than tenmonths.We esti-mate that more than half of these yards will go out of business and therefore reduce our estimate for global yard capacity by 5 millioncgtto52millioncgtbyyear-end2014(fig.9).Chinese Figure SB.9 Figure SB.10 -10-50510-10-505102006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Annual changes in regional yard capacityMillion cgtAnnual changes in regional yard capacityMillion cgtSources: Clarksons, Danish Ship FinanceWe estimate a combined reduction in global yard capacity of 5 million cgt in 2014China South Korea Japan Europe Rest of the world38 40382392%86% 86%82%77%66%77%78%50%0%20%40%60%80%100%0204060801002008 2009 2010 2011 2012 2013 2014 2015 2016Global yard utilisationMillion cgtSources: Clarksons, Danish Ship FinanceGlobal yard utilisation expected to increase to 77%Based on a 5 million cgt reduction in 2014 capacityCapacity Scheduled delivery Delivery UtilisationDanish Ship Finance (Danmarks Skibskredit A/S) Shipping Market Review - May 201417yardsareexpectedtoaccountfor60%oftheannualreduction in global yard capacity. If these projections turn out to be fairly accurateandtheordersscheduledfordeliveryaredelivered, global yard utilisation is expected to peak at 95% in 2014. How-ever,inpreviousyears,extensivepostponementshavetaken place.In2013,everyfourthvesselscheduledfordeliverywas postponed.Consequently,itwouldbemorerealistictoassume that global yard utilisation will settle at 77% in 2014 (fig. 10). 2015 CAPACITY DOWN BY 6% TO 49 MILLION CGTTheoutlookfor2015remainssubjecttofuturecontractingac-tivity.Itshould,however,beclearthatthewindowofoppor-tunity for placing orders with expected delivery in 2015 is com-ing to an end. Assuming that it takes 18 months to build a ves-sel,thewindowwillcloseintwomonths.Nevertheless,some yards,particularlyinChina,dooffersignificantlyshorterdeliv-erytimes.In2013and2014,somevesselswerecontracted with a delivery time of only eight to ten months. For such short delivery time to make sense, it is plausible that yards had start-ed building these vessels before the owner was found. Anyway, basedonthecurrentorderbookandafterallowingfororder postponements, 38 million cgt is expected to be delivered during 2015.Globalyardcapacityisprojectedtocontinuetodecline. We estimate that global yard capacity will fall to 49 million cgt, a reduction of 3 million cgt or 6%, in 2015. Based on this, global yardutilisationwillbeat78%,whichwillobviouslybeaslight improvement from 2014 (fig. 10). LESSONS LEARNED FROM HISTORY Historyhastaughtusthatyardclosuresareoftenalongpro-cess. So, what if global yard capacity does not adjust as quickly asweforecast?Whatifcurrentcapacityismaintaineduntil 2016?Intermsofglobalyardutilisation,notmuchwillchange priorto2016aslongasweallowoneoutoffourorderstobe postponedforoneyear.Globalyardswillneedtosecurenew ordersof17millioncgttobedeliveredin2016.Thatseems clearly possible in view of the contracting activity of the last few years (fig. 11). Figure SB.11 NEWBUILDING PRICES COULD DECLINE ALREADY IN 2015 Newbuildingpricesincreasedduring2013asaresultofthe massivecontractingactivity,inparticularduetotheorders placed for 2014 delivery. Of the 2013 orders, 17% were sched-uled to be delivered in 2014. If these orders had been scheduled for later delivery, global yard utilisation would decline by 2 per-centage points from 66% in 2013 to 64% in 2014. Newbuilding pricesare,generallyspeaking,unlikelytoincreasewithlower utilisation rates. We can extend this reasoning and consider the 2015 utilisation rates dependence on postponements.It seems realistic to envision a scenario where newbuilding prices for low-specvessels decline already in 2015. This would particularly be the case if yard capacity adjusts more slowly than we predict. 464855 53493840382321792%86% 86%82%77%66%70%67%0%20%40%60%80%100%0204060801002008 2009 2010 2011 2012 2013 2014 2015 2016Global yard utilisationMillion cgtSources: Clarksons, Danish Ship FinanceScenario: no capacity reduction and no new ordersBut one out of four orders postponed for one year from 2014Capacity Delivery Spare capacity (70% utilisation) UtilisationDanish Ship Finance (Danmarks Skibskredit A/S) Shipping Market Review - May 201418CONTAINER SHIPPING MARKET REVIEW MAY 2014 CONTAINER IN2013,THECONTAINERMARKETHADANOTHERCHALLENG-INGYEAR.THENOMINALSUPPLYSURPLUSWIDENED4PER-CENTAGEPOINTSANDAVERAGEBOXRATESDECLINEDAFTER ATURBULENTYEAR.SHIPVALUESREMAINEDATLOWLEVELS ANDSHIPOWNERSCONTINUEDTOORDERLARGERVESSELS. THEOUTLOOKFORTHEPOST-PANAMAXSEGMENTREMAINS VERYDIFFICULT.THEFLEETISTOOYOUNGTOBESCRAPPED BUT SUPPLY REMAINS SEVERAL YEARS AHEAD OF DEMAND. WE EXPECTTOSEEVALUEDEPRECIATIONSFOROLDER,INEFFI-CIENT POST-PANAMAX VESSELS IN THE YEARS TO COME. FREIGHT RATES SHIPOWNERSMADESEVERALATTEMPTSTOARTIFICIALLYIN-CREASEBOXRATESIN2013,BUTWITHOUTMUCHSUCCESS. THEALREADYDEPRESSEDTIMECHARTERMARKETREMAINED UNDER PRESSURE.AVERAGE BOX RATES DOWN BY 8% Shipownersstruggledtokeepboxratesupin2013andended theyearwithanaveragerate,outofChina,8%lowerthanin 2012.TheservicetotheUSWestCoastwastheonlyonethat increased(1%)astheUSeconomyimproved.Thecomposite index averaged 1,082 after a year with considerable fluctuation. Incontrast,2014startedoffstronglywithrisingrates.Inpar-ticular, rates between China and Europe improved, and starting inlateDecembertheyroseby20%,reachingindex1,696in mid-February, 10% above the highest peak of2013. Rates did, however, begin to decline after that in conjunction with the Chi-neseNewYearandinApriltheywerebackattheDecember level (fig. 1). THE TIMECHARTER MARKET REMAINS DEPRESSED Thetimechartermarketsufferedfromtheovercapacityissues. Rates grew by 7% in 2013, but this was froma very low level. TheharshconditionsarefurtheremphasisedbyourContainer Profitability Index, which demonstrates the very limited earnings potential for tonnage providers in the current market. However, fuelefficientvesselsmayperformbetterthanindicatedbythe index.Theindexkeptrelativelystablewithanaverageindex value of around 106 in 2013, up from 88 in 2012 (fig. 2). Figure CS.1 Figure CS.2 08-20101,21512-201188105-20121,336 600 850 1,100 1,350 1,600 600 850 1,100 1,350 1,6002005 2006 2007 2008 2009 2010 2011 2012 2013 2014IndexIndexContainer box rates down by 8% in 2013But recovered 2% during the first four months of 2014Composite IndexSources: China's Ministry of Commerce, Danish Ship FinanceAnnual average01-2010-8803-2011510 (500) - 500 1,000 1,500 2,000-500 - 500 1,000 1,500 2,0002005 2007 2009 2011 2013Container Profitability Index(2004 = Index 1,000)Container Profitability Index(2004 = Index 1,000)Container Profitability Index(Timecharter rate per teu less OPEX per teu)Container Profitability IndexSources: Clarksons, Danish Ship FinanceContainer Profitability IndexDanish Ship Finance (Danmarks Skibskredit A/S) Shipping Market Review - May 201419 Figure CS.3 Danish Ship Finance (Danmarks Skibskredit A/S) Shipping Market Review - May 201420SUPPLY & DEMAND DEMANDANDSCRAPPINGPICKEDUPIN2013BUTNOT ENOUGH TO ABSORB THE 6% SUPPLY INCREASE. The container industry continues to be characterised by an over-supply of tonnage. While only around 4.5% of the fleet was idle, a significant share of the fleet is being utilised at low levels, and vesselscontinuetoslowsteam.Itseemsthattheindustryis beingshapedbyasavingstrategythatminimisesthemarginal costspermovedteuthroughhugeinvestmentsinlargecost-efficient vessels. This strategy seems currently to be adding ca-pacitytoanalreadyoversuppliedmarket.Linersarecascading larger vessels to smaller vessels trades to employ a bigger part of their fleet. Besides, we are seeing a tendency towards opera-tional consolidation as they aim to make their combined opera-tionsmorecost-efficient.Consequently,tonnageprovidersare losing ground and many are suffering severely.THE FLEET INCREASED BY 6% Whileanalarming1.8millionteuwasscheduledtoenterthe fleetin2013,astillmassive1.3millionteuenteredthefleet, ledbythePost-Panamaxsegment,withanetfleetgrowthof 15%. The remaining 30% was postponed for later delivery. Even thoughfleetgrowthhasslowedoverthelastcoupleofyears, andthefleetsofthesmallersegmentsarecontracting,thein-flow of larger Post-Panamax vessels continues to increase. 2013 was the eighth successive year where the total fleet experienced an average nominal inflow of 1.3 million teu (fig. 4). Today, ap-proximatelyeveryfourthcontainervesselatseaisaPost-Panamax vessel, equal to 55% of total capacity. SCRAPPING REACHED ALL-TIME HIGH Thepoormarketconditionstriggeredrecord-highscrappingac-tivitywithinthePanamaxtransitablesegments.Atotalof 440,000teuwasscrappedduring2013.Thehighdemolition activitycombinedwithamodestinflowofnewvesselswithin thesesegmentsresultedinaslightly improvedmarketoutlook, andseveralofthesmallersegmentswitnessednegativefleet growthduringtheyear(fig.5).Duringthefirstfourmonthsof 2014,tenPost-Panamaxvesselsof5,000teuwithanaverage age of 18 years were scrapped. Figure CS.4 Figure CS.5 13%16%14%13%6%10%8%6%6%-10%-5%0%5%10%15%20%-1,00001,0002,0003,0002005 2006 2007 2008 2009 2010 2011 2012 2013 2014Teu (,000)Sources: Clarksons, Danish Ship FinanceSmaller vessels' share of deliveries declinedMeanwhile they constituted the majority of scrapped tonnagePost-Panamax HandyFeeder Panamax Sub-PanamaxScrappingDliveriesAnnual fleet growth-500-25002505007501,000-500-25002505007501,0002005 2006 2007 2008 2009 2010 2011 2012 2013 2014Teu (,000)Teu (,000)Sources: Clarksons, Danish Ship Finance Delivery DemolitionDanish Ship Finance (Danmarks Skibskredit A/S) Shipping Market Review - May 201421YOUNGER VESSELS BEING SCRAPPED The average age of vessels scrapped continued to decline during 2013. The average age of vessels scrapped was 22 years, which wasaone-yeardropcomparedwiththeaverageagein2012. Two of the Post-Panamax vessels scrapped sofar in 2014 were just 16 years old, which was extraordinary.CONTAINER DEMAND UP BY 2% IN 2013 Seabornecontainerimportvolumesincreasedby2%in2013. Asiancontainerimportsremainthebiggestdriverofvolume growth,contributing42%togrowthin2013.TheMiddleEast andAfricacontributed 15%and20%,respectively,whileNorth AmericaandEuropecontributed6%and9%,respectively.The averagetraveldistanceremainedfairlyconstantduring2013, whichmeantthatdistance-adjustedcontainerdemandresem-bled the growth in volumes (fig. 6).ASIAN DEMAND INCREASED BY 3% Asia continues to be the biggest importer of containerised goods in volumes and demand grew by nearly 3% in 2013 (fig. 7). The MiddleEasthasdoubleditsexportstotheregionsince2005, butNorthAmerica,followedbyEurope,continuestoconstitute the biggest share of Asian imports ASIAN EXPORTS TO NORTH AMERICA INCREASED BY 3% TheUnitedStatesincreaseditsoverallimportsby1%in2013 and is now back at pre-crisis levels. Its imports constitute 86% of theNorth American regions total imports from Asia. Howev-er, this share has declined from a level of 92% over the last ten years, whereas Canada and Mexico have both gained 2%. EUROPE BACK ON TRACK WITH POSITIVE IMPORT GROWTH ContainerisedimportsintoEuropeincreasedby1%aftera tough2012withnegativegrowth,indicatingthattheregionis slowlyfightingitswayoutoftheslump.Themaincontributors to the growth were found in Eastern Europe, led by Russia and Turkey. Some of the biggest losers of the recession are still bat-tling with negative growth, especially Greece, Italy and Ukraine. Theimprovedmarketfundamentalsmeantthatthemaintrade route from Asia and Europe also increased by 1%. Figure CS.6 Figure CS.7 9% 10%4%-10%15%7%2% 2%-20%-10%0%10%20%30%-20%-10%0%10%20%30%2006 2007 2008 2009 2010 2011 2012 2013Year-on-year growthYear-on-year growthTotal distance-adjusted container demand up by 2% in 2013World Asia -> North America Asia -> Europe Intra AsiaSources: IHS Global Insight, Danish Ship Finance5%3%1%1%2%1%3%0%2%4%6%8%013253850Africa Asia AustraliaandOceaniaEurope Middle East NorthAmericaS. Americaand CaribsYear-on-year growthMillion teuImport volumes, 2013 Sources: IHS Global Insight, Danish Ship FinanceYOY growth in imports >> Danish Ship Finance (Danmarks Skibskredit A/S) Shipping Market Review - May 201422CONTRACTING AND SHIP VALUES THECONTAINERSEGMENTREGAINEDSOMECONFIDENCEIN 2013 AND CONTRACTING ROSE TO THE HIGHEST LEVEL SINCE 2007.THISRESULTEDININCREASINGNEWBUILDINGPRICES FOR ESPECIALLY LARGER POST-PANAMAX VESSELS.CONTRACTING REACHED 2 MILLION TEU IN 2013 After a year with low contracting activity, shipowners seemed to regain confidenceoverthe course of 2013, contracting 1.9 mil-lionTEU(242vessels)withanaveragesizeof8,200TEU.This wasthelargestcontractingvolumesincetheboomin2007. With 88% of all contracts for vessels of 8,000 teu or more, the industry seems to be gearing up for the anticipated 2016 open-ingoftheenlargedPanamaCanal.TheexpansionoftheCanal hasleftthecurrentPanamaxsegmentseverelythreatenedand no contracts were made in this segment in the entire year. The deliverytimewasonaverage26months,butitprovedtobe very volatile and some of the big Post-Panamaxes are scheduled to be delivered in a little over 14 months (fig. 7). NEWBUILDING PRICES INCREASED BY 15%Newbuildingpricesincreasedacrosstheboardasdemandfor newvesselsintensifiedonceagain.Thepriceofan8,500teu Post-Panamaxvesselincreasedby15%betweenJanuary2013 andApril2014,reflectingshipownersappetiteformorecost-effective vessels (fig. 8). SECONDHAND PRICES WENT UP BY 8% SellingandpurchasingactivityremainedlowforPost-Panamax vessels, especially for the larger vessels. Even though the mas-sive ordering in combination with the already oversupplied mar-ket should be expected to lower secondhand values, at least for less fuel efficient vessels, we find little evidence of this. In fact, the value of a five-year old 8,500 teu vessel seemed to increase by8%fromJanuary2013toApril2014.Highexpectationsfor futureearningsarebuiltintothesevalues.Letushopethat thesevesselswillbetradinglongenoughtobenefitfromafu-ture recovery (fig. 8). Figure CS.8 Figure CS.9 0123408001,6002,4003,2002005 2006 2007 2008 2009 2010 2011 2012 2013 2014Average delivery time (years)TEU (,000)Post-Panamax 3,000-7,999 Post-Panamax 8,000-11,999 Post-Panamax 12,000+26 monthsAverage delivery time>>Sources: Clarksons, Danish Ship FinanceAverage delivery time>>Sources: Clarksons, Danish Ship Finance03570105140035701051402007 2008 2009 2010 2011 2012 2013 2014 2015Million USDMillion USDSources: Clarksons, Danish Ship FinanceNewbuilding price up 15% from January 2013 to April 20148,500-9,100 TEU Newbuilding 8,500-9,100 TEU 5YRDanish Ship Finance (Danmarks Skibskredit A/S) Shipping Market Review - May 201423 OUTLOOK THESIZEOFTHECURRENTORDERBOOKLEAVESNOIMMEDI-ATE HOPE FOR AN IMPROVEMENT OF THE SUPPLY AND DEMAND BALANCEIN2014ANDBEYOND.EVENTHOUGHDEMANDIS EXPECTEDTOPICKUP,WEBELIEVETHATTHECONTAINER MARKET IS IN FOR A MORE PROLONGED RECOVERY PROCESS. TheoutlookforthePost-Panamaxcontainersegmentisbleak. The fleet is young, the orderbook stands at 36% of the fleet and the demand outlook is characterised by lower future growth po-tentialinmanybothemergingandadvancedeconomies. Structural issues related to high unemployment, low investment, persistentoutputgaps,tightcreditsandlargelevelsofdebt constrainthefuturegrowthoutlookforcontainerdemand. Moreover,unlikeothershipsegments,weseelittlepossibilities fornewmajortradelanestoemergebecausetheincremental growth of container trade is so meticulously linked to global GDP ingeneraland nationalGDPinparticular.PleasereadtheGen-eral Review and Outlook for a comprehensive discussion. ASIA REMAINS THE HEART OF GLOBAL CONTAINER TRAFFIC Asia remains the heart of global container traffic. In 2013, Asian containerexportsaccountedformorethan50%oftotalexport volumes and contributed two-thirds of the growth in export vol-umes.Asiancontainerimportsaccountedforalmost40%of total import volumes and contributed 42% to the growth in vol-umes. CHINESE GROWTH DRIVES MUCH OF ASIAN CONTAINER DEMANDThereisaclosecorrelationbetweentheoutlookforAsiancon-tainer demand and the Chinese economy. The rise of China as a leadingexporterhasbeencloselylinkedtotherapidgrowthof supply-chainnetworksinAsia(i.e.thosethatarecentredin China). According to the IMF, China accounted for about 50% of all intra-Asian trade flows of imported inputs in 2013. For many of its Asian trading partners, China has become the single most importantdestinationforintermediategoods,sincesupply-chains have more frequently been routed through China for the final stage of assembly. But Chinese imports from its Asian trad- Figure CS.10 Figure CS.11 49%31%15%5%0% 0%36%0%15%30%45%60%0.01.252.503.755.00-5 5-10 10-15 15-20 20-25 25+% of the Post-Panamax fleetMillion teuSources: Clarksons, Danish Ship Finance36% of the Post-Panamax fleet is on order while 80% of the fleet is 10 years or younger3-7,999+ teu 8-11,999+ teu 12,000+ teu % of fleet2739486012202024162022261427334004590135180045901351802003 2008 2013 2017Million teuMillion teuContainer import volumes are on average expected to increase 5% annuallyAsia Europe North America OtherAnnual growth+ 8.8Annual growth+ 3.0Annual growth+ 5.1Sources: IHS Global Insight, Danish Ship FinanceDanish Ship Finance (Danmarks Skibskredit A/S) Shipping Market Review - May 201424ingpartnersaretoalargeextentmirroringChinasexternal demand, in particular from North America and Europe. CONTAINER DEMAND UP BY 5% ANNUALLY UP TO 2017 Accordingly,theoutlookforthecontainerindustryisultimately expected to be driven by the growth potential in North American andEuropeancontainerimportsfromAsia(i.e.thetwolargest distance-adjustedhead-haulimporters).EuropeanandNorth Americandemandis,onaverage,expectedtoincreaseby5% annuallyupto2017.Globalseabornetradevolumesarealso expectedtoincreaseby5%annuallyonaverageupto2017 (fig. 10). THE POST-PANAMAX FLEET SET TO INCREASE BY 15% IN 2014 The Post-Panamax fleet is expected to increase by 15% in 2014. Almost1.4millionteuisscheduledtoenterthefleet,ofwhich 400,000teuwasdeliveredduringthefirstthreemonthsof 2014. It appears almost absurd to consider the scrapping poten-tialforafleetwhereonlyapproximately5%ofthevesselsare olderthan15years.True,vesselsasyoungastenyearshave beenprematurelyscrappedinthesmallersegments,butthose have been extraordinary cases, not a new norm. Still, in a sce-nariowhereallvessels arescrappedimmediatelybeforeaspe-cial survey, starting from the third special survey, approximately 300,000 teu could be demolished in 2014. This reduces the an-nualPost-Panamaxfleetgrowthby1percentagepointto14% (fig. 11). If the level of postponement seen in 2013 is repeated in2014,and30%oftheorderbookispostponedoneyearfor-ward,annualfleetgrowthcouldcomedownto11%.Asimilar trend applies for 2015 and 2016. FREIGHT RATESConsequently,thenominalgapbetweensupplyanddemandis expectedtowidenfurtherin2014andbeyond.Boxratesare expected to be highly volatile in this market. Liners will struggle tocutcostsandtosecureacceptableutilisationontheirnew andlargervessels.Basedonthesupply-demandoutlook,itis difficulttoimaginehowthecurrentboxratelevelcanbesus-tained. However, the last few years have shown that box rates Figure CS.12 can be maintained at high, albeit volatile, levels despite a signifi-cantsupplysurplus.Tonnageprovidersandownerswitholder vessels will continue to suffer. Timecharter rates are expected to remainlowandthenumberofvesselsidledorlaid-upisex-pected to increase. POST-PANAMAX SECONDHAND VALUES ARE EXPECTED TO DECLINE It is only infrequently that Post-Panamax vessels are up for sale. The low selling and purchasing activity makes it difficult to put a marketpriceonthesevesselsthatdivergessignificantlyfrom thenewbuildingprice(i.e.thereplacementcost).However, secondhandpriceshavealreadystartedtoreflectthefactthat some sizes, ship designs and engine types are more suitable for thefuturemarketthanothers.Buttheissuetoconsiderforfu-ture secondhand prices is how and when the market will factor in thatmanyvesselsareeventuallyexpectedtobescrapped prematurely. We expect to see value depreciations for the more inefficient vessels within the next year or two. 18% 18%15% 14%11%9%-1-0.8-0.6-0.4-0.200.20.4-75007501,5002,2502006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016(,000) teuSources: Clarksons, Danish Ship FinanceThe Post-Panamax fleet is projected to grow by 14% in 2014, after allowing for premature scrapping3-7,999+ teu 8-11,999+ teu 12,000+ teu Annual fleet growthScrapping DeliveriesDanish Ship Finance (Danmarks Skibskredit A/S) Shipping Market Review - May 201425CRUDE TANKER SHIPPING MARKET REVIEW MAY 2014 CRUDE TANKER 2013STARTEDWITHLOWSPOTRATES,CREATINGAGLOOMY MARKETOUTLOOK.HOWEVER,ATYEAR-END,POSITIVESEN-TIMENTRETURNEDANDRATESINCREASED.UNFORTUNATELY, CONTRACTING DID AS WELL, WHICH SIGNIFICANTLY LOWERED THE POSSIBILITY OF A NEARBY MARKET RECOVERY. FREIGHT RATES DURING2013THEMASSIVEOVERSUPPLYCAUSEDRATESTO DESCENDTONEWLOWS.HOWEVER,JUSTWHENRECOVERY SEEMED TO BE OUT OF REACH, RATES SOARED AND THE BAL-TIC DIRTY TANKER INDEX SURGED ABOVE INDEX 1,000. Thehighfleetgrowthatthebeginningoftheyearincombina-tionwithChinasdecisiontodestockcrudeoilsentVLCCrates plummetingtotheirlowestlevelinmanyyears.However,as Chinabeganrestockinglaterintheyear,atthesametimeas theAtlanticmarketwassufferingfromweather-relateddelays, the market turned. Subsequently, the market seemed more bal-anced than initially assumed. SUDDEN SPIKE IN SPOT RATES During2013,thecrudetankermarketcontinueditsdownturn and the Baltic Dirty TankerIndex (BDTI) hovered around index 600 for most of the year. However, around the beginning of No-vember,themarketsoaredandtheBDTIclimbedaboveindex 1,000(fig.1).TheincreasestartedintheVLCCsegment,but spreadtotheothersegmentsshortlyafterwards.Goinginto 2014, VLCC spot rates began to slide once again, while Suezmax and Aframax rates maintained their upturn a little longer. NEW TROUGH IN TIMECHARTER RATES Timecharterrates have never been lower than in 2013, reflect-ingtheovercapacityinthemarket.Theaverage1-year timecharterrateforVLCCswasaslowasUSD18,000perday forthemajorityof2013,whileSuezmaxesremainedaround USD16,000perday.Laterintheyear,thedeclinewashalted byincreasedtonnagedemand.Consequently,1-yeartimechar-terratesincreased,firstintheVLCCsegmentandtheninthe Suezmax and Aframax segments. VLCCs experienced the sharp-est increase, growing more than 50% from October to year-end. Figure T.1 Figure T.2 05001,0001,5002,0002,50005001,0001,5002,0002,5002005 2006 2007 2008 2009 2010 2011 2012 2013 2014IndexIndexSources: Clarksons, Danish Ship FinanceBDTI experienced a significant spike at year-endIt climbed from index 600 to above 1,000Baltic Dirty Tanker IndexBaltic Dirty Tanker Index, annual average020,00040,00060,00080,000100,000020,00040,00060,00080,000100,0002005 2006 2007 2008 2009 2010 2011 2012 2013 2014USD per dayUSD per daySources: Clarksons, Danish Ship FinanceHistorically low timecharter rates in most of 2013Spike in the fourth quarter: VLCC rates increased 50% from October to year-endVLCC Suezmax AframaxDanish Ship Finance (Danmarks Skibskredit A/S) Shipping Market Review - May 201426Source: IHS Global Insight, Danish Ship Finance Middle East Asia Pacific33%Africa Asia Pacific11%Middle East North America10%South America Asia Pacific7%Middle East Europe7%Europe Asia Pacific6%Africa Europe4%South America North America2%Asia Pacific Asia Pacific2%South America South America2%Other16%Major crude tanker trades(Measured in billion tonne-miles, 2013)Figure: T.3 Danish Ship Finance (Danmarks Skibskredit A/S) Shipping Market Review - May 201427 SUPPLY & DEMAND THE CRUDE TANKER MARKET REMAINED UNDER PRESSURE FOR MOST OF 2013. YET TOWARDS YEAR-END, RATES SPIKED AS A CONSEQUENCEOFRECORD-HIGHDEMANDFROMCHINACOM-BINEDWITHSLOWERFLEETGROWTH.STILL,FLEETGROWTH EXCEEDEDDISTANCE-ADJUSTEDDEMANDGROWTHANDTHE OVERSUPPLY CONTINUES TO BE A MAJOR ISSUE. CRUDE TANKER FLEET GREW BY 2% IN 2013 Afteryearsofbeingrelativelyhigh,fleetgrowthcamedownto just below 2% in 2013 the lowest growth rate since 2002 (fig. 4). Growth was concentrated in the first six months, where after fleet growth turned negative. DECREASING NUMBER OF DELIVERIES Overall,thecrudetankerfleetexperiencedadecreaseindeliv-eries compared with previous years. In 2013, roughly 16 million dwtenteredthefleet,almost10milliondwtlessthantheyear before.Atthesametime,thepoormarketenvironmentinthe first three quarters led to 10 million dwt leaving the fleet during the year, of which 8 million dwt was scrapped the highest lev-el since 2003. The remainder constituted vessels removed from thefleetprimarilyconversions.Upuntil2010, removedvessels representedatleasttwo-thirdsofthetotalnumberleavingthe fleet;however,thishaschangedoverthelasttwoyearswith significantly more scrapping than removals. HIGH LEVEL OF POSTPONEMENTS AND CANCELLATIONSBesidesscrapping,thelowfleetgrowthwasaresultofahigh level of postponements and cancellations, amounting to approx-imately50%ofordersscheduledfordeliveryin2013.Intotal, deliveries scheduled for 2013 constituted about 30 million dwt at thebeginningoftheyear,ofwhich18milliondwtwasVLCCs, 10 million dwt Suezmaxes and 2 million dwt Aframaxes. Around 6milliondwtwasrescheduledforlaterdeliveryandanother9 million dwt was cancelled (fig. 5). Non-deliveries in the Suezmax andAframaxsegmentswerealmostequallydividedbetween postponementsandcancellations,whiletwo-thirdswerecan-celled in the VLCC segment. Figure T.4 Figure T.5 7%4%5%3%7%5%7%5%2%-20.0%-15.0%-10.0%-5.0%0.0%5.0%10.0%-20-100102030402005 2006 2007 2008 2009 2010 2011 2012 2013Million dwtSources: Clarksons, Danish Ship Finance15.5 million dwt entered service in 201310 million dwt left the fleet in 2013VLCC Suezmax AframaxDeliveriesScrappingNet fleet growth, year-on-year >>54%44% 43%0%15%30%45%60%75%0510152025VLCC Suezmax AframaxPercentageMillion dwtSources: Clarksons, Danish Ship FinancePostponement and cancellations held back fleet growthOnly 49% of the scheduled deliveries materialisedScheduled deliveries DeliveredPostponed orders Cancelled orders>Danish Ship Finance (Danmarks Skibskredit A/S) Shipping Market Review - May 201428SEABORNE CRUDE OIL TRADE DECLINED 1% IN 2013 Overtheyear,seabornecrudeoiltradedeclinedby1%toa totalof1.8billiontonnes(fig.6).Themainreasonforthisde-crease was that both North America and Europe reduced imports of crude oil, albeit for very different reasons. US CONTINUES TO REDUCE IMPORTSThe production of shale oil, a very light/sweet type of crude oil, hasgrownrapidly intheUS,anddomesticcrudeoilproduction isnowatitshighestannualaveragesince1989.Thishasre-duced the amount of light/sweet crude oil imports needed by US refineries, primarily at the expense of medium-haul West African and North Sea exports, as they produce a similar type of crude oil. However, as USrefineries areconfigured to run on a medi-umcrudeoilgradethatcanbeobtainedbymixinglight/sweet crude oil with a heavy/sour crude oil, the US has increased im-ports of the latter. This has primarily been sourced from Canada and Saudi Arabia. Saudi Arabia is a long-haul trade route, which has offset someof thedecline in distance-adjusted demand re-sulting from Canadian crude oil being transported to the US via pipelines. EUROPEAN REFINERIES ARE SUFFERING Europeisscalingbackproductionofrefinedproductsasacon-sequenceofglobalcompetitionandwaningdomesticdemand. In 2013, seaborne crude oil volumes into Europe fell by 12 mil-lion tonnes, equivalent to a drop of 4%, as a result of refineries curbingutilisationratesandtheshutdownoftheUK-based Coryton refinery. INCREASE IN LONG-HAUL WEST AFRICAN TRADE ThedecreaseinUSandEuropeancrudeoilimportsfromWest AfricahasmadethecrudeoilavailabletotheAsianmarketin-stead. Asia is a keen recipient of West African crude oil as it can bemixedintoitsnormalcrudeslate.Theinclusionofa light/sweetWestAfricancrudeoilresults inmoreproductionof high-qualityproducts.Consequently,in2013Asiaincreasedits crude oil imports from Africa by 9 million tonnes, 44% of its to-talimportincrease.Thelongdistanceofthisparticularroute contributedpositivelytodistance-adjusteddemand.Overall, Figure T.6 Figure T.7 -2% -3%-2%8%-8%10%-7%3%-1%-20%-10%0%10%20%30%-20%-10%0%10%20%30%2005 2006 2007 2008 2009 2010 2011 2012 2013Annual growthAnnual growthSources: IHS Global Insight, Danish Ship FinanceSeaborne crude oil trade declined 1% in 2013World Asia Pacific Europe North America8%2%9%0%1%6%5%-3%0%3%6%9%12%02004006008001,000Africa Asia Pacific CentralAmericaand theCaribbeanEurope Middle East NorthAmericaSouthAmericaAnnual growthMillion tonnesSources: IHS Global Insight, Danish Ship FinanceGrowth in long-haul imports to AsiaWest Africa was the main contributorDanish Ship Finance (Danmarks Skibskredit A/S) Shipping Market Review - May 201429Asia Pacific increased its crude oil imports by 22 million tonnes, primarilyfromAfrica,theMiddleEastandSouthAmerica(fig. 7). The bulk of this was driven by China, which continues to ex-pand its refinery capacity and crude oil inventories. DISTANCE-ADJUSTED DEMAND REMAINED AT 2012 LEVEL Overall,themarketshowednegativegrowthinseabornecrude oiltradein2013,particularlyinthefirsthalfoftheyear.Dis-tance-adjusteddemandremainedonaparwith2012dueto morelong-haulimportsfrombothChinaandtheUS(fig.8). Thiswasonthebackof2%fleetgrowth,whichwasskewed towardsthebeginningoftheyear.Consequently,marketfun-damentals improved during the second half of 2013 and resulted inatemporaryspikeinspotrates.However,thecrudetanker market remains oversupplied. Figure T.8 -7%-10%6%11%-9%7%-4%7%0%-20%-10%0%10%20%30%-20%-10%0%10%20%30%2005 2006 2007 2008 2009 2010 2011 2012 2013Annual growthAnnual growthSources: IHS Global Insight, Danish Ship FinanceDistance-adjusted demand on a par with 2012World Asia Pacific Europe North AmericaDanish Ship Finance (Danmarks Skibskredit A/S) Shipping Market Review - May 201430 CONTRACTING AND SHIP VALUES AFTER RELATIVELY LOW ORDERING ACTIVITY OVER THE YEAR, CONTRACTINGSUDDENLYPEAKEDINDECEMBER.9MILLION DWTWASORDEREDINTHATMONTHALONE,PUSHINGBOTH NEWBUILDING AND SECONDHAND PRICES UPWARDS. VLCC CONTINUES TO BE THE PREFERRED VESSEL TYPE Ordering has been sparse over the past two years with less than 10milliondwtcontractedannually.However,thespikeinspot ratesduringthelasttwomonthsof2013whettedinvestors appetiteforcrudetankers.Atotalof17milliondwtwascon-tractedin2013,ofwhich9milliondwtwasorderedinDecem-ber.Goinginto2014,thehighleveloforderinghascontinued and more than 6 million dwt was contracted in the first quarter approximatelytwiceasmuchasinthesameperiodin2013 (fig. 9). NEWBUILDING PRICES HIT ALL-TIME LOW IN 2013 Atthebeginningof2013,newbuildingpricescontinuedtheir decline and reached an all-time low by May (fig. 10). The price ofanewbuildVLCCdroppedaslowasUSD89.5million,down 7%comparedwiththesameperiodin2012.Thereafter,the price of an Aframax newbuilding slowly began to climb, followed bySuezmaxesandbySeptemberalsoVLCCs.However,the surgeinassetpricesreallytookoffinNovemberasaresultof the increased ordering activity driven by the soaring spot rates. Fromthelowsof2013tothecurrentpricelevelinApril2014, newbuildingpriceshaveincreasedbyUSD8-10millionorap-proximately 15% across all segments. SECONDHAND PRICES DROPPED 10% IN 2013 Secondhandpricesfollowedasimilartrendbutfacedasteeper descentduringthefirstpartof2013,withpricesonaverage falling more than 10% across all segments. By November, they started to recover, and during the first quarter of 2014, the in-crease was even sharper (fig. 10). Figure T.9 Figure T.10 01325385063013253850632005 2006 2007 2008 2009 2010 2011 2012 2013 2014Million dwtMillion dwtSources: Clarksons, Danish Ship Finance17 million dwt contracted in 201390% was VLCCsVLCC Suezmax Aframax04080120160200040801201602002005 2006 2007 2008 2009 2010 2011 2012 2013 2014Million USDMillion USDSources: Clarksons, Danish Ship FinanceAsset prices climbed in the fourth quarter after having hit record lows earlier in 2013VLCC - Newbuilding priceVLCC - Secondhand priceDanish Ship Finance (Danmarks Skibskredit A/S) Shipping Market Review - May 201431 OUTLOOK THECRUDETANKERMARKETCONTINUESTOSUFFERFROM MASSIVE OVERSUPPLY, AND DESPITE EXPECTATIONS OF FAIR-LYPOSITIVEDEMAND,ORDERINGACTIVITYIN2013HAS DAMPENED THE MARKET OUTLOOK. MASSIVE RISE IN CONTRACTING IS OF INCREASING CONCERN Atthebeginningof2013,theorderbookseemedmanageable and fleet growth was expected to fall in the coming years. How-ever,theunexpectedboomincontractingattheendof2013 naturallycausedtheorderbooktoincrease,currentlyconstitut-ing 12% of the fleet (fig. 11). With the current market suffering fromthemassiveoversupply,anorderbook/fleetratioof12% raisesdoubtsaboutarecoveryinthenearfuture.Moreover, slowsteaminghasbeenusedextensivelytominimizeoverca-pacity,butadditionalspeedreductionsseemunlikelyatthis point. However, if the market improves, vessels may once again resume to design speed. FLEET GROWTH TO BE LIMITED BY SCRAPPING Tooffsettheincreasingamountofdeliveries,scrappinghasto playalargerpartintheequation.Theagedistributionofthe fleetlimitstheobviousscrappingpotential,butthelowfreight rates could encourage owners to scrap more vessels premature-ly. If vessels, on average, are scrapped at the age of 20 years, net fleet growth could potentially average 1.5% over the coming three years (fig. 12). Postponements and cancellations have the potential to drag fleet growth down even further. Hence, if ves-sels contracted prior to 2010 are either postponed or cancelled, thiswouldbringfleetgrowthdowntoaleveljustabove2%in 2014. GROWTH IN SEABORNE OIL TRADE EXPECTED AROUND 2-3%To counterbalance fleet growth and remove some of the current oversupplyinthecrudetankersegment,demandhastogrow significantly.Underthecurrentcircumstances,seabornecrude oil trade is expected to increase by about 2-3% over the coming years,upfrom-1%in2013(fig.13).Thisdevelopmentisex-pected to be driven primarily by Asia, China in particular, as it is expandingitsrefinerycapacityanditsstrategicpetroleumre- Figure T.11 Figure T.12 38%26%25%8%2%0%12%0%10%20%30%40%50%03060901201500-5 5-10 10-15 15-20 20-25 25+ OrderbookPercentage of fleetMillion dwtSources: Clarksons, Danish Ship FinanceCurrent orderbook represents 12% of the fleetScrapping potential is decreasing VLCCSuezmaxAframax5%7%5%2%3%0%2%-3%0%3%5%8%10%-100102030402010 2011 2012 2013 2014 2015 2016Million dwtSources: Clarksons, Danish Ship Finance15 million dwt scheduled for delivery in 2014VLCC Suezmax AframaxNet fleet growth, year-on-yearDeliveriesScrappingDanish Ship Finance (Danmarks Skibskredit A/S) Shipping Market Review - May 201432serves significantly. MORE LONG-HAUL CRUDE OIL TRADE FROM WEST TO EAST China, along with several other Asian countries, is currently ex-periencingariseincrudeoilimportsasaconsequenceofnew refinerycapacitycomingonline.Themajorityofitscrudeoil imports stem from theMiddle East.Consequently, the develop-mentofMiddleEasternrefinerieswillhaveaneffectontrade patterns. At present, the Middle East acts as a major export hub forcrudeoil.However,overthecomingyears,itsrefineryca-pacity will expand by 2.5 million barrels per day and its crude oil exportswilldeclineasaresult.Partofthiswillhavetobere-placedbyAtlanticBasincrudeoil,particularlyfromWestAfrica and to some extent also from South America. This will result in more long-haul crude oil trade and thus will contribute positively to distance-adjusted demand growth. THE JOKER IS NORTH AMERICA AnotherwaytosupportrisingAsiancrudeoildemandisfor North America to increase its crude oil exports. However, the US hasbannedallcrudeoilexportsandCanadaissufferingfrom infrastructureconstraints.Canadaisthereforecurrentlyconsid-eringdevelopingtheEnbridgepipeline.Thiswouldenableitto transport crude oil from Alberta, mid-Canada, to the west coast, where it could be shipped to Asia. If the project is approved and construction begins in 2014, the pipeline is expected to be com-pletedin2018andthereafterreducetraveldistancesforAsian imports. The US, on the other hand, is already able to push out relatively large amounts of crude oil, and a lifting of the current banonexportswouldhaveanimmediateeffectonthecrude tanker market. In 2013, there was extensive debate on the sub-ject,asUScrudeoilproducersweresellingtheircrudeoilata discount. Should the US decide to lift its ban, this would have a positiveeffectondistance-adjusteddemand,asitisexpected thatmuchwouldbesoldtoAsia.However,theUSseemsto value its energy independence, and thus an outright removal of the ban is highly unlikely, but some waivers may be added over the coming years. Figure T.13 DISTANCES MAY PROVIDE SOME SUPPORT TO THE MARKET Allinall,longerdistancesmayprovidesomesupporttothe marketinthecomingyears.However,in2014fleetgrowthis still expected to be on the high side of tonnage-demand. Conse-quently,themarketwillremainunderpressurein2014asa resultofovercapacity,whereas2015mayseesomeimprove-ments. 10%-7%3%-1%2% 3% 2%-20%-10%0%10%20%30%-20%-10%0%10%20%30%2010 2011 2012 2013 2014 2015 2016Annual growthAnnual growthSources: IHS Global Insight, Danish Ship FinanceSeaborne crude oil trade is expected to increase in the coming yearsWorld Asia Pacific Europe North AmericaDanish Ship Finance (Danmarks Skibskredit A/S) Shipping Market Review - May 201433PRODUCT TANKER SHIPPING MARKET REVIEW MAY 2014 PRODUCT TANKER IN2013THEPRODUCTTANKERMARKETIMPROVEDASTHE COMBINATIONOFLOWFLEETGROWTHANDNEW,HIGHLY COMPETITIVEEXPORTHUBSBOOSTEDMARKETFUNDAMEN-TALS.HOWEVER,MASSIVEORDERINGACTIVITYANDPOTEN-TIALLYSHORTERDISTANCESREDUCETHECHANCESOFA MARKET RECOVERY. FREIGHT RATES THESPOTMARKETPICKEDUPIN2013ASARESULTOFFA-VOURABLEMARKETCONDITIONS,ANDSPOTRATESREACHED ALEVELNOTSEENSINCE2008.TIMECHARTERRATES,HOW-EVER, WERE A LITTLE SLOWER TO ADAPT BUT STARTED TO IN-CREASE IN THE SECOND HALF OF THE YEAR. MR SPOT RATES UP 26% IN 2013 The product tanker market improved in 2013 after a 2012 with toughconditionsandlowfreightrates.MRspotearningsin-creasedbyaround26%overtheyearandreachedalevelnot seensincetheheydayof2008(fig.1).Thestrongstarttothe year waslargely a result of Hurricane Sandy hitting the US East Coastinlate2012andtheverycoldandlongwinterthatfol-lowedinthenorthernhemisphere.Thereafter,themarketwas primarilysupportedbyincreasingUSexportsofpetroleum products, which once again hit a record high of close to 4 million barrels per day. The market turned in September and spot rates plummeted due to a mild US hurricane season and low European demand for heating oil. During the last few months of the year, spot rates regained some strength, but continued to be subdued bythemildwinter.Thiswasfurtherexacerbatedbythelarge number of newbuildings hitting the water at a rapid pace.

TIMECHARTER RATES TRENDING SLIGHTLY UPWARDS The improved market sentiment was also felt in the timecharter market, where rates slowly but steadily began to trend upwards. In particular, the 1-year timecharter rates for LR1s and MRs in-creased by 9% and 11%, respectively, both ending the year just above USD 15,000 per day