Shipping cycles are difficult to predict.

Since the 1970s, but especially looking back in the last fifty years, the world economy has been remodeled from a closed collection of economic zones dominated by the European and Sino-Soviet empires, to a free trade system between more than 100 independent countries. This evolution spearheaded a period of almost continuous change as the European empires were decomposed in the 1950s, followed by the Soviet empire in the late 1980s, and as China joined the open world market place in the 1990s. Shipping is the lifeblood of the global economy The world shipping industry has been greatly affected through four consecutive periods of seaborne trade growth, spread at approximately fifteen year intervals between 1955 and 2005 During the 1950s, Europe dismantled its colonial system and rebuilt its economy after the war around free market trade principles. In the early 1960s, the Japanese economic miracle produced a decade of growth during which Japanese imports reached astonishing 600 million tons In the 1960s and the 1970s, economic growth demonstrated by South Korea and the Asian Tigers followed the growth development of Japan In the 1990s, China started its own developing miracle

Shipping forecasts rely heavily on economic forecasts The last three waves of seaborne trade had a characteristic pattern. These waves, usually referred as Trade Development Cycles (TDCs), are driven by the development cycle of the emerging economies. As a countrys economy develops, the demand for raw materials such as oil, forest products, coal, iron ore and nonferrous metal ores increases as the industrial infrastructure is raising up. Almost no nation is fully self-sufficient. Every country must sell what it produces and acquire what it lacks. None can depend on domestic resources alone. If specific raw materials are not available locally they must be imported, as must the more sophisticated machinery. These imports are paid for by exports of manufactures and any primary exports which are available. The balance of foreign and domestic markets thus forms a basic requirement of growth at this stage. Automobiles, textile, assembly and shipbuilding industries frequently are developed as lead export earners, a pattern set by Japan in the 1950s and later followed by South Korea and several other countries. When economic forecasts fail, shipping forecasts fail to It is clear that although the cycle is well understood, it is very difficult to predict the turning point. Participants in the shipping business do well remember the rapid trade growth caused by the European and the Japanese TDCs in the 1950s and the 1960s ended with an investment bubble in the early 1970s that left the broader shipping industry under a dark cloud for about twenty years. Further, as we move through the Chinese TDC, shipping owners and investors can benefit by understanding Chinas progression along the steep slope of the development cycle. Chinas economic growth precisely follows the classic TDC. Normally energy and steel dominate the development process. During the last five years, about 70 percent of the growth of Chinese import cargoes have come from iron ore and oil, while the unitized or container cargo absorbs the remaining percentage. With other steel related trades and products included, energy and steel accounted for about two thirds of Chinas import growth. This is exactly what happened in Europe and Japan

during the previous TDCs and without these rapidly growing commodities, Chinas rise would hardly have been noticed. Generally speaking, the strong correlation between global economic activity and demand for seaborne transports is well known, which simply underlies growth in tonnage demand. Shipping industry and current world economy predictions The world economy is decelerating quickly-buffeted by an extraordinary financial shock and by still-high energy and commodity prices, and many advanced economies are close to or moving into recession, the IMF says in its latest World Economic Outlook (October 2008). The world economy is entering a major downturn in the face of the most dangerous financial shock in mature financial markets since the 1930s, according to the WEO, which now expects world growth to slow to 3.0% in 2009-0.9 percentage point lower than forecast in the July 2008 WEO update. As a result, on an annual basis, global growth is expected to moderate from 5.0% in 2007 to 3.9% and 3.0% in 2009. WTO expects world trade growth to slow to 4.5% in 2008 (2007: 5.5%-2006: 8.5%) due to slowdown in OECD economies, a situation which will not be fully offset by emerging market demand. Alarm bells have recently begun to ring. A looming recession is no longer considered unlikely or even impossible. The Bank for International Settlements has warned that the sub-prime crisis was merely a reflection of growing debt burdens in the developed world, which could soon contribute to a severe slowdown, sentiments echoed by the IMF. History is replete wit examples of strong connections between global economic health, financial stability, the oil price, global unrest and the fortunes of the shipping industry. Greek shipping veterans still remember the pitiful site in the early 1980s of so much laid up tonnage in Elefsis Bay that it looked as though someone was building a pontoon bridge of ships to join Salamis to the mainland. These associations are themselves fluid-often appearing illogical-pursuing prevailing trends. Ignoring economic and fundamental signs can be perilous for shipping participants. As far as the future of international trade is concerned, all eyes are on China. Indeed the opening of China and India has made and will continue to make a significant impact on globalization, while there is no doubt that the fortunes of the shipping industry are strongly tied to the economic growth of these two and other developing countries. nd th They are the 2 and the 4 largest economies accounting for some 40% of the world population, and it is self explanatory that the combined production by, and demand from, these economies continue to influence global economic activity. China consumes half of the worlds production of iron ore. Chinas current urbanization represents about 100Km2 per month-roughly the size of Dublin (114Km2). This unprecedented growth is expected to continue into and beyond the next decade with China forecasted to quadruple its GDP and increase its urbanization from 40% to 55% by 2020. This rapid economic expansion has created a vast appetite for imported raw materials and more manufactured goods shipped to foreign markets. The current world average steel consumption per capita- a good measure of development- is 145Kg/capita. By contrast, China already consumes 320Kg/capita, fast approaching Europes average level of 364Kg/capita, while India lags at 35Kg/capita. Consensus expects slower growth this year for China and in 2009 than the heights of 2007. IMF lowered estimate to 9.7% growth in 2008 and 9.3% in 2009. IMF forecasts The IMF forecasts for 2008 average growth in emerging markets of 6.9%, down from 7.8% last year. Chinese GDP is expected to ease to 10% from 11.4%. The rest of developing Asia

if forecast to grow at 8.6% down, from 9.6%, while Africa is anticipated to grow at 7%, up from 6% in 2007. Further, the IMF foresees 2008 growth of 1.5% in the US, 1.6% in the EU and 1.5% in Japan, while Russian growth is estimated to 7.1% from 7.8%. High oil prices and shipping activity The world is currently facing some new challenges of high oil prices and the collapse of the toxic-sub prime market in the US which threaten world growth. Oil price increases have long been known to exert a negative effect on economic activity. A clear negative correlation between energy prices and aggregate measures of output of employment has been extensively reported. Many economists however, believe that oil no longer influences the world economy as it did in the past. Oil no longer exerts such influence on economies although the International Monetary Fund (IMF) estimates that a $10 increase in the price of oil still reduces 0.6% from output and adds 0.4% to inflation in industrialized countries. Despite this historical correlation, enormous increases in oil prices since 2004 did little to dampen surging economic growth until mid- 2007. In this point, we need to underline that changes in oil prices (bunker prices) have a major bearing on spot freight market rates and part of the reason for the recent decline in some Worldscale rates is because much lower bunker prices for the shipping have meant much lower operating costs. So far, oil prices are now less then half their peak levels seen in July 2008, with WTI down from $145/bbl to below $70/bbl currently. As a result, as oil prices have fallen, bunker prices have followed suit, and are now close to $350/ton (24 Oct.2008) compared with more than the $750/ton only three months ago. The nature of international trade patterns in relation with shipping services Demand for shipping services is derived from the demand for the products being shipped and it is therefore important to examine trends and forecasts in international trade patterns. Taking in consideration the current financial crisis, even should demand in North America, Europe and Japan be depressed for a time, it is argued that the industrial revolution going in China, India and other emerging economies will sustain requirements both for dry and wet cargoes to the region. Since much of the raw material for the Far East production is sourced in South America and Africa, the soaring commodity prices will create new wealth in the countries of these continents that should translate into a second-wave boom once Asian growth stabilizes. In this regard, it should be noticed that Chinas nominal GDP per capita remains only $2,500 per annum and Indias $1,000, compared with $45,000 for the US, so much room for growth remains. Also, looking the population of China and India, you have 1.3bn Chinese and 1.1bn Indians. If they are to sustain a certain standard of living - which means so many calories a day, so much oil a day, so much steel a day- you just have to look at the numbers and say times one billion. For example, Greece is a big shipping nation owning about 17,4% of the world fleet, but if Greece were to go to US levels of development and consumption, it would still mean nothing because it is only 11mn people. At the same time, it is important to have a look at all of Southern Asia Vietnam Cambodia maybe Myanmar will kick in as well. Pakistan is already starting to have 6-7% growth. Most probably Bangladesh will follow, and all this comes in the middle of the Chinese boom, while right now Asia accounts already for about 65% of the total dry bulk market share. Therefore, they {Asia} are going possibly to become more like us {developed countries} and maybe we are going to get some of our productive business back again, because they wont

be able to produce it as cost effectively and transport it back to us as cost effectively. So maybe, we will go through the same cycle again. Various shipping sectors and different routes Supply and demand differ in the various sectors of the industry and also on different routes. The market brings together the buyers and the sellers, i.e. the operators and the shippers, so the final demand for goods to be transported is different within the various shipping sectors. Shipping participants are now used to spectacular volatility in freight rates, which in turn are almost connected with global financial institutions, equity markets, currencies, oil prices. As markets continue to freeze amid the global economic slowdown and all shipping markets tend to ebb and flow in line with the cycles of world trade, the divergence between the collapse in the dry bulk sector and the relative health of the tanker market looks like a puzzle. The frightening volatility is becoming clear when we compare rates per ton of cargo in the dry and liquid bulk sectors: VLCC rates from the Arabian Gulf to Asia have fluctuated between a low point of just under $10 a ton to the odd peak of around $40 a ton over about the last four years. Capesize rates from South America to the Far East, on the other hand, have been much more volatile. They have ranged from low points of around $20, hitting $40 in May 2007 and staying well above that level until a few weeks ago. Rates hit their peak in July 2008, at more than $100 a ton.

It is also notable, that the current squeeze on credit which feeds the shipping cycle is currently responsible for the easing of the over-supply of newbuildings, while statistics had shown massive ordering across all type of vessels, with the dirty tanker orderbook for example rising to nearly 166 million dwt, or 45% of the existing fleet. The easing of the newbuilding activity can be explained through cancellations of orders, existing or new, as well as non-delivery of vessels ordered due to a lot of Greenfield shipyards defaults (shipyards wont get built or not able to deliver refund-guarantees), a situation which in turn reduces the fleet order-book at a time when an over-supply of tonnage threatens the shipping market, and as a result improves the balance between supply and demand. On the other hand, shipping companies that already have operations in the Middle East are streamlining them to mitigate losses faced in other markets, which clearly proves that diversification within the sector is a further defense strategy in choppy waters. In this sense, all sectors of the shipping industry in the region (Middle East) are expected to grow by an average of 25 per cent to 35 per cent this year (2008), far above the industry projections of 13 per cent. While the Middle East has not escaped the economic crisis, it still provides hope to most industry players due to the high level of demand for commodities and relatively competitive rates compared to the global trend. It is clear that rates have gone down everywhere, but regional operations are still able to break even despite the problems of port congestion. The high demand for imports and availability of liquidity from oil revenues gives a clear sign. Nikolaos Noulezas Spring 2008