Bulk Ports, Terminals & Logistics 2013, 12-14 May 2013, Antwerp, Belgium

Demand outlook for major dry bulk commodities, the rise and fall of the Euro: consequences for the dry bulk tradeOlleÖstensson, Caromb Consulting Bulk Ports, Terminals & Logistics 2013, 12-14 May 2013, Antwerp, Belgium

Outline of presentation • A slow global recovery • The Euro crisis is having long term effects on growth • Slow growth in emerging countries • Iron ore • Coal • Grains

World economic growth is recovering, but is still slow (annual rate of growth in GDP) Source: IMF, World Economic Outlook, April 2013

The outlook for the Euro area weakens: Europe focuses on reducingdeficits (and isdoingsofasterthan the US)Governmentdeficit, per cent of GDP Source: IMF, World Economic Outlook, April 2013

And debtwillslowly come downGovernmentgrossdebt, per cent of GDP Source: IMF, World Economic Outlook, April 2013

But the costis high in lostgrowth and few new jobs GDP growth, per cent per year Employment (2007=100) Source: IMF, World Economic Outlook, April 2013

Unemploymentiscoming down onlyslowly and unevenly Unemploymentwillfallfaster in the US, % And is more evenlydistributed United States Highestunemployment: 9.6 % (California, Mississippi, and Nevada) Lowestunemployment: 3.3 % (North Dakota) Euro area Highestunemployment: 26.3 % (Greece) Lowestunemployment: 5.4 % (Germany) Sources: IMF, World Economic Outlook, April 2013, U.S. Bureau of Labor Statistics, Eurostat

Conclusion: Wesaved the Euro, but wekilledgrowth • Austeritypolicies in Europe willbe a drag on growth for a long time • Deleveraging in the bankingsectorwillconstraincredit, particularly for new enterprises • Slow growthwillimpederatherthanfacilitate structural and institutional change • Lack of investment in infrastructure will lead to loss of competitiveness • Trade willbedivertedfrom Europe • Slow growth in Europe willhurtitstradingpartners – Europe isstill the world’slargestmarket

Emerging economies are losing steam The growthengine has run out of fuel Per cent annual change 2003-2017, emerging and developing countries • The Euro crisis means that demand for emerging economies’ exports is growing slower than they should • Domestic overheating requires cutbacks in government expenditure (or should do so) • High oil prices squeeze growth Source: IMF, World Economic Outlook, April 2013

Slowdown in China – but littlesign of necessaryrebalancing • China is entering a period of economic reorientation with more focus on consumption, less on exports and investment – but the change is happening slowly • Continued export dependence means that slow growth in developed countries hurts China’s prospects, and at the same time production costs are rising in China • For demographic reasons, growth will be slower in the future (the labour force stops growing in 2014 or 2015) Source: IMF, World Economic Outlook, April 2013

Is slowergrowth in China a disaster?Addition to Chinese GDP, constant billion yuan renminbi, historical and calculatedat 7 % annualgrowth Source: IMF, World Economic Outlook, April 2013, and own calculations

Conclusion on the macro-economic outlook • The recovery is under way, but it is weak and fragile and growth will be below potential for some time • The global imbalances are growing smaller, reducing the risk of new crises • The Euro has been saved – we think – but at a very high cost in terms of foregone growth • Emerging economies see their prospects reduced by slow growth in export markets and their economies are only slowly gaining the capacity to generate endogenous growth • The United States is our best hope

Short term outlook: Iron ore (1) Crude steel: World monthly production, Mt • World steel production increased by only 1.2 % in 2012; the rate of growth will be higher this year, at about 3 % • China will – again – have to account for most of market dynamism. • Chinese steel demand will grow by about 5 % this year Source. World Steel Association

Short term outlook: Iron ore (2) Monthly crude steel production in China, change on one year earlier • Chinese crude steel production was a record 709 Mt in 2012 (increase by 3.6%) • The rate of increase was slow until last autumn, but is again accelerating, partly because of expansive government policies • Production will exceed 750 Mt in 2013 Source: World Steel Association

Short term outlook: Iron ore (3) China: imports’ share of iron ore use still growing Iron ore imports increased by 8,5 % in 2012, helped by more flexible pricing Port inventories have come down dramatically, by 50 Mt, since mid-2012 Domestic iron ore production (run of mine ore) decreased by 0,5 % in 2012. Ore grades continued declining, however, and if converted to standard grade, production probably fell by 10-20 % - despite reasonably high prices The entire additional Chinese need for iron ore in 2013 will be covered by imports, which will probably approach 800 Mt Sources: China Metallurgical Newsletter, TEX Report

Short term outlook: Iron ore (4) • Chinese imports up by 55 Mt in 2013 • Imports in rest of world up by maybe 20 Mt, with increases mainly in Asia and North America • Exports increasing from Australia and Brazil, negligible recovery of Indian exports • Total rise in seaborne trade of 75 Mt in 2013

The longer term • Two tendencies will influence Chinese iron ore imports: • Falling steel intensity as the economic reorientation gets under way • Increasing share of imports as domestic mines are forced to close • World supply will be more diversified in the future, but the new producers will take longer than expected to enter the market Sources: IMF World Economic Outlook Database and World Steel Association (own forecast for steel production 2013)

Short term outlook: Coal (1) • The coal market has become much more dynamic in recent years. Coal is set to overtake oil the most important energy source and the geography of world coal trade is being reshaped. • Most important changes: • China’s switch from a large exporter of both thermal and metallurgical coal to the world’s largest importer • The growth in India’s coal imports • Indonesia’s growing exports (and, to a lesser extent, Australia’s) • Coal being squeezed out of the domestic US market and becoming available for export, including from the West Coast • The emergence of Mongolia and Mozambique as future major exporters

Short term outlook: Coal (2)Change in imports 2004-2013, Mt Thermal coal (total change 325 Mt, 65 %) Metallurgicalcoal (total change 66Mt, 32 %) Source: Ownestimates

Short term outlook: Coal (3)Change in exports 2004-2013, Mt Thermal coal Metallurgicalcoal Source: Ownestimates

Short term outlook: Coal (4) • Thermal coal demand in Asia is expected to see a modest increase in 2013 and accelerating growth in 2014, rapidly increasing Indian imports is a new factor • Elsewhere in the world, slow economic growth and competition from natural gas is limiting demand, but European imports are expected to increase due to replacement of nuclear with coal • Total growth in thermal coal trade in 2013 is expected at about 30 Mt • Demand for metallurgical coal will follow steel demand, growing by 3-4 % • Seaborne trade will grow by only about 5 Mt • As a result, total seaborne trade of coal is likely to increase by about 35 Mt in 2013

Short term outlook: Grains (1) World grain production, Mt Harvests were disappointing in 2012, but cultivated area is increasing and a rebound in production is expected in 2013/2014 and 2014/2015 A large portion of the increase will be accounted for by maize, followed by wheat Industrial consumption is now a less important driver of growth The food crisis over – for now Source: Credit Suisse, 3 April 2013

Short term outlook: Grains (2) Grain exports • Trade volumes are expected to decline by 10-15 Mt in 2012/2013 • Trade is likely to increase in 2013/2014 and the following year • Stocks are forecast to fall in 2012/2013, but may recover in 2013/2014 • Shipping volumes in 2013 are expected to increase by 10-15 Mt Source: Credit Suisse, 3 April 2013(data for 2006/2007-2012/2013)

Overall conclusions • Assuming that the macro-economic risks are managed... • 2013 will see only modest growth in dry bulk commodity trade, with total volume increasing by about 100 Mt – but the uncertainty is on the upside • China accounts for almost all of the increase, most of it in the form of iron ore imports

THANK YOU! olleostensson@gmail.com

Bulk Ports, Terminals & Logistics 2013, 12-14 May 2013, Antwerp, Belgium