<p>Dry Bulk: Dry bulk rates continued their sharp descent in 4Q:08 as cargo demand declined<br/>dramatically amid the global economic slowdown, in our opinion. The market currently shows<br/>little sign of recovering in the near future as large fleet supply growth looms on the horizon,<br/>numerous cancellations notwithstanding. On the demand side, we believe recent output cuts by<br/>major iron ore miners along with indications that Chinese industrial activity continues to<br/>weaken, could make 2009 a difficult year for dry bulk rates.<br/>n Oil Tankers: The tanker market remained unseasonably weak during 4Q:08, with rates for<br/>modern VLCCs averaging $68,575 per vessel/day compared to $89,316 per vessel/day in 4Q:07.<br/>In 1Q:09 so far, it appears that the growing trend of VLCCs being chartered as floating storage<br/>has offset any lower tonnage demand from the recent OPEC production cuts; however, we<br/>expect 2009 to be a challenging year as worldwide oil demand growth slows, new vessels enter<br/>the fleet and OPEC potentially cuts supply further. Furthermore, we believe rates could be under<br/>pressure later in the year as vessels recently chartered as storage return to trading.<br/>n LPG: Time charter rates for VLGCs fell during 4Q:08 as a significant number of new deliveries<br/>into the fleet weighed on the market. An uncertain outlook for Middle Eastern exports,<br/>combined with excessive tonnage supply, could lead to a difficult near-term market environment<br/>for the sector.<br/>n Given the uncertain demand outlook and large orderbook for dry bulk vessels, and to a lesser<br/>extent oil tankers, we have lowered our dry bulk and tanker rate forecasts for 4Q:08 and 2009.<br/>As such, we have updated our estimates and price targets for our coverage universe (see page 9<br/>for dry bulk, page 18 for tankers and page 23 for LPG).</p><p>Dry Bulk Shipping Industry<br/>The dry bulk market scrambles to<br/>recover hope after the horrific<br/>end to 2008<br/>2008 was certainly an exceptional year for the dry bulk shipping industry. The Baltic Dry<br/>Index (BDI) ended 2008 at 774, down a staggering 92% from 9,143 at the end of 2007 (see<br/>Exhibit 1). The BDI reached both its all-time record high (11,793 on May 20th) and all-time<br/>record low (663 on December 5th) in 2008. We suggest much of the decline in the market<br/>was due to a sharp retraction in Chinese industrial activity starting in 3Q:08, which was<br/>exacerbated by a dispute between Vale and Chinese steel mills and historically high levels of<br/>iron ore situated at Chinese ports. However, after several months of minimal importing,<br/>stockpiles of iron ore at Chinese ports have come down to about 60 million tons in 1Q:09. As<br/>such, there has been a mild rebound in demand for Capesize vessels as Rio Tinto, Vale and<br/>BHP Billiton secure ships to carry iron ore cargoes to China. Furthermore, the annual iron ore<br/>price negotiations have already begun between the major iron ore producers and Chinese steel<br/>mills. The Chinese reportedly are seeking a 40% price decrease retroactive January 1st (as<br/>opposed to the customary April 1st timeline), which may also help explain the pick-up in<br/>activity in the Capesize market. Nonetheless, there are still an estimated 65-70 Capesize<br/>vessels at anchor. This latent supply, in our opinion, could restrain any further increases in<br/>freight rates.</p><p>Along with the collapse of the BDI and extreme illiquidity in the sales and purchase market,<br/>asset values for dry bulk tonnage were very difficult to ascertain in 4Q:08, although it was<br/>clear they had fallen dramatically during the quarter. Our normal information source for<br/>secondhand asset values, Clarkson's Research Services, temporarily suspended its<br/>secondhand asset value data series in October 2008, so we have supplemented November<br/>2008-January 2009 with data from Compass Maritime Services (see Exhibit 4b). Modern<br/>secondhand Capesize vessels could be purchased for approximately $45 million in January,<br/>down an astonishing 65% from $129 million in October and down 71% from a peak of $155<br/>million in July. Similarly a 5-year old Panamax currently costs roughly $26 million, down<br/>from $71 million and $88 million over the same time period. Comparatively, newbuild prices<br/>have held up relatively well (see Exhibit 4a), with a new Capesize commanding $88 million<br/>in January, down from $92.5 million in October. We suggest the resilience of newbuild asset<br/>values is being driven more by stickier material and labor costs for the shipyards, compared<br/>to secondhand values, which are generally driven more by the near-term dry bulk rate<br/>environment. As such, the premium that prompt secondhand vessels had commanded has</p><p>completely evaporated. Now, a 5-year secondhand vessel could be purchased for 50-55% of<br/>the equivalent newbuild ship (see Exhibit 5), depending on the vessel class, which is down<br/>markedly from a high of over 160% in May 2008. This ratio is now significantly below the<br/>historical mean of approximately 80%, which suggests to us that either secondhand values<br/>may rebound from here, or newbuild prices will continue to fall. Given the persistently weak<br/>rate environment and high orderbook, it is more likely, in our opinion, that newbuild prices<br/>will continue to fall over 2009.</p><p></p><p>
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