>SHIPPING SECTOR UPDATE AUGUST 2009 (GEPL)

Baltic Dry Index (BDI) decreased by 28% on month-on-month (m-o-m) basis as in August 2009

■ The Baltic Dry Index, a measure of shipping costs for commodities, continued with negative momentum on signs of slowing Chinese raw-material demand, BDI fell 28% m-o-m. Port bottlenecks for ships have eased through reduced congestion in China, with about 7% of the fleet now held up outside ports, down from a peak of about 14% in early July, this coupled with fleet expansion were the major reason for significant decline in BDI. There remains much concern of course over commodity demand in the second half of the year, particularly from China. According to the Chinese State Council, China's economic growth may start to slow in the second quarter of next year. The Council is also studying curbs on overcapacity in industries including steel and cement.

The BPI decreased over 32% month on month, at 2,157 points, while the BCI and BSI decreased by 27% and 16% to 3,946 and 1,740 respectively. The major reason for this decrease is attributable to the market, which was suffering from too much tonnage and a lack of iron ore cargos out of India.

■ Expected production cuts from OPEC (Organization of Petroleum Exporting Countries) OPEC is expected to reduce shipments by 1.1% in the month to Sept. 19, according to consultant Oil Movements, amid speculation the group is expected to pledge adherence to record supply cuts announced last year. The Organization of Petroleum Exporting Countries is expected to export 22.34 million barrels a day by sea in the four week period, down from an average of 22.58 million barrels a day in the month to Aug. 22, 2009.

OUTLOOK

■ Dry Bulk
The main reason for decline in BDI in the month of July 2009 is slowdown of buying by China for a while as inventory is expected to gone up from previous levels. Though the (second hand) asset price momentum is high, which can be an indicator to increase in trade activities, we feel that higher tonnage in the sea may act as a catalyst for southward movement of day rates in near future. Looking at the current circumstances, we remain NEGATIVE on dry bulk segment.

■ Tankers
There is marginal activities for large sized vessels like VLCCs, however, the performance of other type of vessels (Suezmax and Aframax) was below expectations, which was result of lower activities and higher tonnage supply. The concerns of higher supplies are quite evident from this month as asset prices of second-hand tankers declined by more than 10% across the board, which implies that due to incremental addition in the tonnage, the business of second hand (older) vessels may be severely impacted. Because of over supply concerns, we are NEGATIVE (for short term) for the tanker markets.

To see full report: SHIPPING SECTOR