The Directors' Report
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Odfjell’s consolidated 2008 pre-tax result was a profit of USD 146 million compared with USD 143 million in 2007. The after tax result was a profit of USD 163 million compared to a loss of USD 10 million in 2007, then impacted by the damaging retroactive tax of USD 140 million introduced by the Norwegian authorities. The 2008-result was enhanced by USD 86 million of non-recurring items related to capital gains and taxes. Gross revenue increased by USD 237 million, to
USD 1 476 million. BUSINESS SUMMARY Parcel tankers Our average cost of bunkers in 2008 was USD 461/ton (in-
cluding compensation related to bunker escalation clauses and hedging), compared to USD 329/ton the preceding year. Operating expenses on a comparable fleet basis were about 7% higher in 2008 than in 2007. Although still facing an increase in salaries for mariners, in other respects we expect declining operating expenses as a result of a stronger USD, lower oil prices affecting lubricating oils and, a generally better supply/demand balance for spare parts etc. We also experience better availability and less price pressure with regards to dockings, due to reduced activity at the repair yards. |
At year-end 2008 our parcel tanker fleet consisted of 74 ships over 12 000 dwt, of which 43 were owned – and additionally we operated 18 smaller ships, of which 12 owned.
In February 2008 we cancelled contracts for twelve newbuildings, 45 000 dwt coated parcel tankers in Russia. The corresponding yard instalments were refunded. Yard supervision and other owner’s expenses in an amount of about USD 7 million have been expensed. This latter amount forms part, however, of our claim against the state owned shipyard (Sevmash) to compensate us for all costs and losses, on account of the yard’s wilful misconduct, as well as massive contract breaches. Arbitration has been initiated in Sweden, with a ruling expected later this year.
Early 2008 Odfjell signed agreements with the Chuan Dong Shipyard to build a series of six 9 000 dwt stainless steel chemical tankers. These will be delivered in 2010-2012, at a combined total price of USD 180 million. These newbuildings will operate in our regional trades in Asia and Europe, and will replace smaller vessels currently trading within these geographical areas.
Our 49% owned joint venture company Odfjell Dong Zhan Shipping (Shanghai) Co. Ltd signed a contract for the building of an 8 200 dwt chemical tanker. The ship will be a fully coated IMO II type carrier being built by the Zhoushan Penglai Shipbuilding and Repairing Company, with delivery scheduled for May 2009. The ship will join Bao Hai Tun
(3 845 dwt/ built 2006) and both ships will service the domestic market in China.
From Japan, Odfjell currently holds contracts for fifteen modern ships and newbuildings, all basis long-term time-charters, ranging in size from 19 000 dwt to 33 000 dwt. Thirteen ships are already in operation, of which five were delivered during 2008. The remaining two will be delivered in 2009. We have fixed price purchase options on most of these ships.
Three older ships, Bow Condor (50% owned/27 950 dwt/built 1978), Bow Lancer (35 100 dwt/built 1980) and Bow Maasstad (38 039 dwt/built 1983) were sold in 2008. Also sold was the parcel tanker M/T Bow Bahia (5 870 dwt/built 1996). This latter sale was part of a two-ship sale, which included the sistership Multitank Bolognia owned by our partner, Ahrenkiel. These outright sales represented a total capital gain of about USD 10 million.
Early 2008 Odfjell declared its option to buy Bow Santos
(19 997 dwt, stainless steel, built 2004) for about USD 23 million. Subsequently this ship was sold with a total capital gain of about USD 18 mill. However, this gain must be seen in the context of Odfjell having entered into a bare-boat charter with the new owners, for a period of five years, with purchase options. Finally, Odfjell sold Bow Sky (40 005dwt/built 2005) with a net gain of USD 32 million with an eleven year charter back.
In combination with our worldwide transoceanic services, our regional business activities encompass four different geographical areas. Asia represents a strategically important area for our business, with significant new chemical production expected to come on stream in the near future. Our largest regional operation therefore naturally is in Asia, where we employ 12 ships within several trade lanes, covering the Singapore – Japan/Korea – Australia/New Zealand range.
Odfjell Ahrenkiel currently operates seven smaller parcel tankers within inter-European trades. The intention is to grow this operation, for which some of the 9 000 dwt newbuildings in China are destined.
In South-America, four ships are employed by now wholly-owned Flumar, transporting chemicals primarily along the Brazilian coast, where local flag is a requirement. Finally, we have a 50/50 joint venture with CSAV in Chile, where we currently employ one Chilean-flagged vessel, mostly in coastal transportation of sulphuric acid.
Our type of shipping is one of the most challenging within the marine industry. During 2008 our ships transported more than 570 different products, and more than 6 100 individual parcels. Unlike container ships, for example, our ships have to call a number of customer-dictated berths, even within one and the same port. Such operations are both time-consuming and costly, impacting negatively our time-charter results. Our aim therefore is increasingly to consolidate loading and discharging, ideally at our own or associated terminals. We believe that a future successful consolidation of cargoes, and more time-efficient port operations, will also very much benefit our customers.
Tank Terminals
Gross revenues from our expanding tank terminal activities came in at USD 232 million, EBITDA was USD 95 million and EBIT was USD 68 million. At year-end 2008, book value of total terminal assets was about USD 800 million, an increase from USD 770 million in 2007.
Odfjell’s existing tank terminals are located in Rotterdam, Houston, Singapore, Onsan in Korea, Sohar in Oman, BIK in Iran, and Jiangyin, Dalian and Ningbo in China. We also have a valuable cooperation agreement with a group of tank terminals in South America, owned by members of the Odfjell family.
The expansion of our tank terminal activities continues. We are making substantial investments in expanding the storage capacity in Houston, Rotterdam, Singapore and Korea. Our new terminal in Sohar in Oman, Oiltanking Odfjell Terminals & Co. LLC (OOT), where Odfjell has a 30% ownership, successfully started up storage operations in 2008. OOT so far has put 537 000 cubic meters into operation for the storage and handling of clean petroleum products. This was the first stage of the total 842 500 cbm facility, due for completion first half 2009, including then that of also handling chemicals.
Further expansion comes in China. Together with our long-term partner in Dalian, Dalian Port Co., Ltd. (PDA), a Hong Kong publicly listed company, we have an understanding with the Caofeidian Industry Zone (CFDIZ) for the development of a new world class terminal for oil and chemical products, including chemical gases. With Caofeidian’s unique natural and geographical attributes, this terminal project will allow for ready access by deep-sea chemical and product tankers, thus allowing for important economies of scale in terms of future transportation logistics. Also jointly with our partner PDA, we have continued studies related to a greenfield tank terminal within the Industrial Development Zone on Hainan Island, South China.
The strategy of Odfjell Terminals is to continue to grow along Odfjell’s major shipping lanes, and at important petrochemical logistics junctions around the world. Odfjell Terminals is investing in emerging market countries thus enhancing the development of infrastructure for safe and efficient operations in these regions.
2008 RESULT
Gross revenue for the Odfjell Group came to USD 1 476 million, up 19% from the preceding year. Earnings before interest, tax, depreciation and amortisation (EBITDA) were USD 286 million compared to USD 315 million in 2007. Operating result (EBIT), including USD 53 million capital gain on assets, came to USD 198 million compared to USD 204 million in 2007, then including capital gains of USD 25 million.
The net pre-tax 2008 result came in at USD 146 million compared to a pre-tax profit of USD 143 million in 2007. Taxes in 2008 were an income of USD 17 million, compared to a tax cost of USD 153 million in 2007. Taxes in 2007 and 2008 were heavily impacted by changes to the Norwegian tonnage tax system, whereby retroactively taxes were imposed for profits earned during the period from 1996 to 2006. In 2007 USD 140 million of tax cost was accounted for, whilst in 2008 USD 33 million was reversed, following amendments to the rules. Our cash flow continued strong at USD 272 million, compared to USD 266 million in 2007. Operating expenses as well as general and administrative expenses continued to increase in 2008, partly because of general price increases and a weak USD during most of the year. Net financial expenses for 2008 were USD 52 million, compared to USD 61 million in 2007. The reduction is primarily due to unrealized currency gains on NOK denominated tax debt, as a result of the stronger USD towards the end of the year. The average USD/NOK exchange rate in 2008 was 5.66, compared to 5.86 last year. The USD strengthened against the NOK from 5.40 at year-end 2007 to 7.00 at 31 December 2008.
The parent company, Odfjell SE, recorded a profit for the year of NOK 284 million. The main part of the profit relates to contributions from subsidiaries. The Board recommends a dividend of NOK 1 (USD 0.14) per share for 2008, in total NOK 87 million (USD 12.4 million). The dividend will be covered by the 2008 profit, and the Board recommends that the balance of the profit, NOK 197 million, is transferred to Other Equity. At 31 December 2008 total distributable reserves were NOK 2 251 million.
At the end of 2008 the A-shares were trading at NOK 43.50 (USD 6.22), down 51.1% compared to NOK 89 (USD 16.47) year-end 2007. The B-shares were trading at NOK 45 (USD 6.43) at the end of 2008, down 36.6% from NOK 71 (USD 13.15) year-end 2007. A dividend of NOK 2.00 per share was paid out in May 2008. Adjusted for this dividend, the A- and the B-shares had negative yields of 48.9% and 33.8% respectively. By way of comparison, the Oslo Stock Exchange benchmark index declined by 54.1%, the Marine Index declined by 62.2% and the Transportation Index worsened by 61.7% during the year. The market capitalisation of Odfjell was NOK 3.8 billion (USD 544 million) as per 31 December 2008.
The Annual General Meeting will be held this year on May 5 at 16:00 hours at the Company’s headquarters.
According to §3.3 in the Norwegian Accounting Act we confirm that the accounts have been prepared on the assumption of a going concern.
FINANCIAL RISK AND STRATEGY
Our financial strategy is to be sufficiently robust to withstand prolonged adverse conditions, such as long-term down-cycles in our markets or unfavourable conditions in the financial markets. Odfjell has an active approach in managing risk in the financial markets. This is done through funding from diversified sources, maintaining high liquidity or loan reserves, and through a systematic monitoring and management of financial risks related to currency, interest rates and bunkers. The use of hedging instruments to reduce the Company’s exposure to fluctuations in the abovementioned financial risks, at the same time, however, limits the upside potential from favourable movements in these risk factors. The Company also closely monitors the risk related to a market valuation of the hedging instruments and the effect on the equity ratio, at the end of each quarter.
The single largest monetary cost component affecting time- charter earnings is bunkers. In 2008 it amounted to more than USD 310 million (67% of voyage cost). A change in the average bunker price of USD 100 per ton equals about USD 60 million (or USD 2 300/day) change in time-charter earnings for those ships where we have a direct economic interest. A certain portion of our bunker exposure is hedged through bunker adjustment clauses in the Contracts of Affreightment. As per 31 December 2008 we had additional hedging of about 50% of our total 2009 bunker exposure, through swaps or options.
All interest-bearing debt, except debt by tank terminals outside the US, is denominated in USD. Bonds issued in non-USD currencies are swapped to USD. Interest rates are generally based on USD LIBOR rates. An increasing share of our debt is fixed either through fixed rate loans or through long-term interest rate swaps. With our current interest rate hedging in place, effectively about 40% of our loans are on a 4 -10 years fixed rate basis. In order to reduce volatility in the net result and cash flow related to changes in short-term interest rates, interest rate periods on floating rate debt, as well as that of liquidity, are managed to be concurrent.
The remaining tax liability of NOK 518 million (USD 74 million) as per 31 December 2008 arising from the changes to the Norwegian tonnage tax system in 2007 is payable over the next 9 years. Most of this liability is currently unhedged thus increasing the volatility of currency gains/losses relating to movements in the USD/NOK exchange rate. Based on the exchange rate as per 31 December 2008 and the current hedging in place, a 10% change in the exchange rate will impact 2009 unrealized gains/losses by about USD 5 million.
The Group’s revenues are primarily in US Dollars. Only tank terminals outside the US, our European shipping trade (through Odfjell Ahrenkiel) and our domestic shipping activity in China derive income in non-USD currencies.
Our currency exposure relates to the net result and cash flow from voyage related expenses, ship operating expenses and general and administrative expenses denominated in non-USD currencies, primarily in NOK and EUR. We have estimated that a 10% strengthening of the USD versus the NOK and EUR will improve the pre-tax 2009 result by roughly USD 15 million, disregarding then the result of any currency hedging in place.
Our currency hedging at the end of 2008, whereby we have sold USD and purchased NOK, covers about 70% and 40% of our 2009 and 2010 NOK-exposure, respectively. Future hedging periods may vary depending on changes in market conditions.
LIQUIDITY AND FINANCING
The Company’s cash reserves including available-for-sale investments, which are low risk, and highly liquid bonds, continues strong. Cash and cash equivalents and available-for-sale investments as of 31 December 2008 was USD 193 million compared to USD 165 million as of 31 December 2007. The company had no undrawn credit facilities per 31 December 2008, compared to USD 64 million the preceding year. Interest bearing debt increased from USD 1 346 million year-end 2007 to USD 1 500 million per 31 December 2008. Net interest bearing debt was USD 1 307 million as per 31 December 2008. The equity ratio was 28% as per 31 December 2008 and the current ratio was 1.1. Since our fleet consists of speciality ships, in a market with limited relevant sale and purchase activity, we have not attempted to calculate value-adjusted shareholders’ equity. The company should be evaluated based on earnings multiples, rather than based on asset valuations.
In March we repaid the outstanding amount of NOK 99 million (USD 19.4 million) on our first bond that was issued three years ago. We also entered into two long-term secured bank facilities, one of USD 40 million and one of USD 135 million, for the construction and long-term newbuilding program in China. In April, our subsidiary Odfjell Terminals (Rotterdam) BV entered into a long-term secured bank facility of EUR 60 million. The proceeds were partly used to repay inter-company debt, and will also be used to finance the on-going expansion at the terminal. Further liquidity came from the sale- and leaseback arrangements of two ships.
In 2008 we paid about USD 120 million as regular instalments on our mortgage debt. Additionally we repurchased NOK 77 million (USD 11.7 million) of the Odfjell SE 2011 NOK-bond at an average price of 88% giving a net gain on redemption of USD 1.4 million.
The Company’s loans are generally long-term and provide for regular payment of instalments. There are no major refinancing needs prior to 2011 when part of our bond debt matures. Furthermore, all major investment commitments are fully financed.
During 2008 the company acquired and sold treasury shares. The most significant transaction was that Odfjell Chemical Tankers AS, a 100% owned subsidiary of Odfjell SE sold 1 679 500 A-shares at the price of NOK 50 and
2 322 482 B-shares at the price of NOK 40 to DnB NOR Markets. The price reflected the average price for shares traded during the last week prior to the trade. Following this sale the Company owns no further treasury shares.
Concurrently with the foregoing, Odfjell entered into a Total Return Swap (TRS) with DnB NOR Markets for all the sold shares. The agreed initial cost price of NOK 50 for the
A-shares and NOK 40 for the B-shares, with expiry on 8 May 2009. In addition, Odfjell held another TRS with DnB NOR Markets of 819 500 A-shares exercised 2 March 2009.
KEY FIGURES
Before retroactive tax, the return on equity was 18.6% and the return on total assets was 8.2%. Return on capital
employed (ROCE) was 10.2% in 2008.
Earnings per share before the retroactive tax effect amounted to USD 1.56 (NOK 8.82) in 2008, compared to USD 1.56 (NOK 9.14) in 2007. Earnings per share after the retroactive tax came to USD 1.95 (NOK 11.04) in 2008. Cash flow per share was USD 3.2 (NOK 18.36), compared to USD 3.19 (NOK 18.69).
As per 31 December 2008 the Price/Earnings ratio (P/E) was 4.0 before retroactive tax and the Price/Cash flow ratio was 2.3. Based on book value the Enterprise Value (EV)/EBITDA multiple is 7.0 while, based upon stock-market value as per 31 December 2008, the EV/EBITDA multiple was 6.5. Interest coverage ratio (EBITDA/Net interest expenses) was 4.4, compared to 5.2 last year.
LEGAL MATTERS
We have settled most antitrust issues with our US based customers. At this point in time it is not possible to estimate the financial impact of any future settlements. These negotiations have not prevented us from doing business with any of our customers, at market terms. Both in 2007 and 2008 the total effect on the net result from customer settlements was immaterial.
From the EU Commission Odfjell received a so-called Statement of Objections in April 2007, which we contested. In May 2008 Odfjell was informed that the European Commission had closed the file in the Chemical Parcel Tanker case. The Commission’s conclusion was that it lacked jurisdiction over the case due to the tramp exclusion contained in Regulation 4056/86, in line with what Odfjell consistently argued before the Commission.
Since the investigations began, Odfjell has strengthened its internal competition compliance program, and has conducted training of all relevant personnel.
HEALTH, SAFETY AND ENVIRONMENT (HSE)
Odfjell’s “Corporate Quality Management Manual” enhanced with the “Corporate HSE Expectations” prescribes how we shall work to comply with the high HSE standards we aim for.
Stringent safety and environmental requirements guide all our operations. Training of personnel working onboard, at terminals and ashore is our proactive way of ensuring that we possess the needed competence. For our mariners more than 7 000 training days were held at the Odfjell Academy (Subic Bay, Philippines). Similar internal training takes place at the terminals.
During 2008, Ship Management started to develop and implement a Competence Assessment program, to ensure that training is so-called skill gap focused. In practical terms this means our training strategy is now more linked to competence assessment, skill gap analyses and establishment of targeted related training programs.
The making and introduction of our new video “Understanding the Risks of Hazardous Chemicals and Burns” was a main effort in 2008.
Operating units have approval to ISM code (ship management), ISO 9001:2000 standard (terminals) and ISO 14001 environment standard. New in 2008 is that the terminal in Ulsan acquired ISO 14001 certification. The new terminal in Jiangyin, China, started operations in 2008 and is in the process of obtaining both certifications.
The various units in line with the ISO 14001 certification have comprehensive annual plans for environmental protection. Odfjell Terminals focus on how they may decrease emission to air. Equipment is already installed to achieve better vapour recovery and control. Reduced emission during gas freeing of ships and barges is also an important terminal activity. Odfjell Tankers focus on energy conservation, and for 2008 the optimization of ship speed has reduced our fuel consumption with about 35 000 tons. In 2008 Odfjell Tankers’ Environmental Council was established to map all our environmental impacts and what we do about them.
There were no fatal incidents with Odfjell personnel during 2008. On ships, the Lost Time Injury Frequency (LTIF) is slightly down from last year. This is positive, but we are still concerned about LTIF, which was better still some years ago. Lessons Learned and awareness campaigns have given some results, and will continue this year. All terminals have good LTIF’s, and especially the results at the Houston terminal show significant improvement during 2008.
In 2008 there have been no major accidents. But, onboard Bow Master, pipes in the manifold area burst as a consequence of nitric acid reacting with remnant cargo. There were no injuries or pollution and damages were limited. However, we considered this a high risk incident, which has resulted in a number of corrective measures.
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Piracy in the Gulf of Aden gave reason to growing concern. In the autumn of 2008 Odfjell decided to avoid the area until the situation improved, which caused considerable media attention. Response from our seafarers and also from other stakeholders was entirely positive. Military presence in the area has meanwhile increased. Since early 2009 Odfjell has decided to resume sailings through the area. All transits shall be made in compliance with recommendations from the Naval Command. No detentions or serious notations from any Port or Flag States have been reported for Odfjell managed vessels in 2008. It is welcome that our increased efforts in this area continue to yield positive results. It also has had a positive effect on customer approvals, vetting, where our situation now is quite satisfactory. That being said, during this year Odfjell has publicly stated that the present vetting regime, with so many individual approvals, is not at all rational for the chemical trade, where the combination of many parcels from several customers on one and the same voyage is the very business model. A regime of common approval is therefore important, and will be pursued through Intertanko. |
Another safety issue which Odfjell has lately promoted is the more consistent use of inerting (nitrogen) to protect against tank explosions. Cargo flammability, and not ship size or age should be the ruling criteria. This view is supported by Norway and many other flag states. But more inerting, in the name of safety, will somewhat influence efficiency, and especially for smaller chemical tankers, and purely for commercial reasons, it seems difficult to obtain consensus. Odfjell will continue to push IMO for the prevention of tank explosions.
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ORGANISATION, WORKING ENVIRONMENT AND JOB OPPORTUNITIESOur organisation was changed, effective 1 January 2008, As a result of increasing tank terminal activities, we established a separate management for tank terminals, as from January 1, 2008. Laurence W. Odfjell took charge of Odfjell Terminals, headquartered to Rotterdam. The terminal activities are further divided into four geographical areas, Asia/Pacific, Middle East /Africa, Europe and Americas. From the same date, our parcel tanker activities were gathered in a new ship operational structure (Odfjell Tankers) that also includes certain staff functions previously placed at corporate level. Jan A. Hammer, as Chief Operating Officer, is heading up Odfjell Tankers. The Executive Management Group consists of Terje Storeng, Jan A. Hammer, Laurence W. Odfjell, Haakon Ringdal and Tore Jakobsen. In accordance with his employment contract, Terje Storeng has elected to resign from his position as President/CEO of Odfjell SE, effective as from the Annual General Meeting on 5 May 2009. The Board has appointed Haakon Ringdal new President/CEO as from that same date. The Board of Directors would like to thank Terje Storeng for his valuable contribution to the Company. In 2008 Odfjell SE became a pure holding company. Previously Odfjell SE employed more than 240 people in administrative positions, within chartering, operations and ship management. Additionally, Odfjell SE employed more than 350 Norwegian and other West-European ship officers and trainees. Effective October 1, Odfjell SE’s 100% owned subsidiaries, Odfjell Management AS and Odfjell Maritime Services AS became operational. Odfjell Management AS and Odfjell Maritime Services AS assumed full responsibility for all employees in Odfjell SE, as well for the services previously provided by Odfjell SE. Furthermore, Odfjell Philippines Inc. obtained its own manning licence in the Philippines, reflecting our commitment to the recruitment of Filipino seafarers. In September the inauguration of the new offices for Odfjell Ship Management (Philippines) Inc. and Odfjell Philippines Inc. took place in Manila. Odfjell strives to develop an inspiring and interesting work environment both at sea and ashore. We carry out employee satisfaction surveys at headquarters in Bergen and other larger offices, and do ergonomics inquiries. Also implemented is a programme for improved health care for seafarers, with focus on exercise and a healthy diet. The work environment is considered good. Odfjell aims at being an attractive place where to work. Gender-based discrimination is not allowed in recruitment, promotion or wage compensation. We maintain our policy of providing employees with the same opportunities to develop skills and to find new challenges within our company. Out of about 240 employees at headquarters in Bergen, 66% are men and 34% women, whilst the corresponding global figures (about 900 employees in our fully owned onshore operations) are 75% and 25% respectively. Recognizing that we employ relatively few women, we endeavour to recruit women to ship operations, chartering and ship management, and also to show that life at sea may offer attractive careers. The recorded absence rate at headquarters was 3.5%, up from 3.1% last year. For the Filipino mariners the absence rate was 6.5% and for European mariners it was 3.9%. The Board takes this opportunity to thank all employees for their contributions to the company’s progress during 2008. STATEMENT ON SALARY AND OTHER BENEFITS TO THE MANAGEMENT FOR 2009 AND 2010The Management shall be offered competitive terms of employment in order to ensure continuity in the Management and to enable the Company to recruit qualified personnel. The remuneration should be composed so that it promotes the creation of values in the Company. The remuneration shall not be of such a kind, nor of such a magnitude, that it may impair the public reputation of the Company. A basic, straight salary is normally the main component of the remuneration. The remuneration may however consist of a basic salary and other supplementary benefits, hereunder but not limited to payment in kind, bonus, termination payments and pension- and insurance schemes. The Company does not run any option schemes, nor other schemes as mentioned in the Public Limited Companies Act section 6-16 subsection 1 no. 3. There are no specific limits regulating the different categories of benefits nor the total remuneration of Management. Remuneration to Management in 2008 was in compliance with the above guidelines. • Fixed remuneration 86% Variable remuneration has been awarded by way of bonus, based on a discretionary evaluation system extended by the Board, as to operational and financial performance during 2008. Bonuses as awarded were paid out end 2008. Please also see Note 3 to the Odfjell SE accounts for more details about the remuneration to the Management in 2008. WORLD SHIPPING CONTEXTFor the shipping industry, 2008 turned out a two-sided year. Until summer most segments enjoyed healthy markets and good earnings. The boom in the dry bulk sector powered on, not least fuelled by the Chinese pre-Olympic demand. By early June the Baltic Dry Index seemed about to break the 12 000 points barrier. The crude oil tanker market experienced similar developments; following a stable first quarter with earnings for modern VLCCs in the USD 70-80 000 per day range, there was a doubling of ship earnings in the period April to June. Despite record-high bunker prices, with heavy fuel oil reaching a staggering USD 750/ton, and high costs for ship maintenance, spare parts and other operating items, the overall market remained optimistic. The world financial crisis however came to severely impact the shipping industry in general. Over the summer months and into the autumn the combination of falling product demand and "financial" trade obstacles such as buyers not being able to get necessary letters of credit, led to a dramatic shift in the supply/demand balance. As a result, during autumn the Baltic Dry Index dropped by close to 95% and VLCC earnings fell by 70%. Fortunately, also the oil price took a dive so that at the end of 2008 heavy fuel oil for bunkers was down to USD 172/ton, levels not seen since early 2005, and this somewhat eased the situation. Nevertheless, many bulk owners suddenly faced serious problems, particularly those with high gearing following expensive second-hand purchases. Speculations arose that parts of the fleet would opt for lay-up, and of some owners having to file for bankruptcy. |
The recession in the transportation industry immediately impacted upon both shipbuilding and ship recycling. Strong markets and good earnings for most shipping companies during recent years have led to a massive ordering of new tonnage, despite very high newbuilding prices and long delivery times. Although it seems reasonable to expect that some of the about 3 400 bulkers, 2 200 tankers and
1 200 container carriers currently on order will be cancelled, sufficient tonnage still will be delivered, to ensure adequate capacity. Hence, the shipowners will hardly receive any immediate supply side assistance, notwithstanding the fact that new ordering has stopped, almost completely. As for bulk carriers, we have seen some orders being converted to product carriers. The halt in new orders, combined with falling steel prices, have led to a softening of newbuilding prices. Second-hand ship prices are also falling. Thus, there would seem room for financially strong owners to consolidate their position in the upcoming times.
Poor freight markets and a massive influx of new tonnage are set to oust outdated ships. Already this has boosted the ship recycling industry, and the activities at the demolition facilities of India and Bangladesh are again on the rise. The increased supply of tonnage for scrap, combined with the general fall in steel prices, has naturally lowered scrapping prices. Despite low scrap prices, a continued weak freight market will likely cause accelerated demolition, as owners find it increasingly difficult to employ overaged tonnage with steadily more quality-conscious customers.
Growth forecasts suggest that the shipping industry is facing a challenging period, at least in the short term. The already rather gloomy GDP predictions published last fall have been further downgraded early this year, now indicating that the overall economy will only expand by about 1% during 2008. OECD will contract by 1.9%, and major economies such as the US, Europe and Japan will all have a negative growth in the 1.9-2.5 range. China and other major developing economies such as India, and Brazil, are predicted to slow down considerably. There is great uncertainty related to the short-term developments of China and India, some experts anticipating these countries will hold out better than feared, in terms of 2009 growth.
In conclusion, the short-term outlook for shipping in general seems bleak. However, most forecasts suggest that 2010 will evidence stronger economic growth, provided the leading economies steer clear of large-scale trade protectionism.
THE CHEMICAL MARKET
For the chemical industry, the strong market of 2007 continued into the spring and summer of 2008. Demand remained firm, and prices of most chemical products were high. The petrochemical production capacity expansion continued, particularly in the Middle East and in China. Reflecting an enhanced focus on non fossil energy bearers, the market for bio fuels such as ethanol and bio-diesel improved further, and the demand for vegetable oils and their input crops kept on rising. However, the debate on the sustainability and economic efficiency of bio fuels persisted, and the dramatically reduced price of petroleum towards the end of 2008 basically killed off bio diesel economics.
The financial turmoil during and after the summer, with a substantial drop in demand and consequently prices for most chemicals, had a severe impact on profitability within the chemical industry. There are consequently production shutdowns throughout the world, and several petrochemical expansion projects have been cancelled or postponed indefinitely. It is still too early to know the magnitude and the duration of these cutbacks, closely related as they are to the activity levels of other global industries, for which the chemical industry is providing essential input materials.
For the chemical seaborne transportation industry the first quarter was quite moderate. During the second quarter activities picked somewhat up, and this continued also into the third quarter of the year. Thus, for much of 2008 the market seemed remarkably able to absorb new ships entering service. Freight rates in general remained at strong levels throughout the summer and early autumn, although much of the increased income came in the form of compensation for record-high bunker prices and, for other operational costs. Only towards the end of the year did the market take a dive. The spot freight market dried up almost completely, as a result of falling demand, and full inventories in most locations, and too many ships competing for too few cargoes. This had a severe negative impact on the spot rates. The piracy threat in the Gulf of Aden during the second half of the year made several owners, first amongst them Odfjell, choose to go around Africa instead of through Suez.
The deep-sea chemical carrier fleet grew by about 12% during 2008, which is a substantial increase from the about 8% growth in 2007. The core fleet showed an increase of 9%. In the deep-sea segment above 13 000 dwt, 137 chemical tankers totalling 2.9 million dwt were delivered during 2008. This is 50% more than the year before. Close to one million dwt (42 tankers), have stainless steel tanks, half of which are 20 000-tonners delivered from Japanese yards. In the swing segment, i.e. fairly unsophisticated coated chemical tankers "swinging” between carrying easy chemicals and refined petroleum products, three times as many new units entered the market compared to 2007.
Following several years of large-scale ordering of new tonnage, basically to replace single-hull tankers and to take advantage of the strong freight markets, the ordering boom ebbed throughout 2008. Increased uncertainty about the market, soaring newbuilding prices and warnings of fleet overcapacity explains cautiousness. During the last months of the year there were hardly any new orders for chemical carriers reported at all and there have lately been examples of orders being partly or fully cancelled. The chemical tanker orderbook of ships over 13 000 dwt now constitutes 37% of the current deep-sea fleet. For the segment of smaller tankers below 13 000 dwt the orderbook is relatively moderate, at about 20% of the current fleet.
There was low scrapping activity during 2008. Only fifteen deep-sea chemical tankers, in total about 460 000 dwt, were delivered for recycling. Of this number just one was a stainless steel ship. Deteriorating freight markets, an influx of modern tonnage, stricter age and quality requirements by customers and demand for operational efficiency are factors that will contribute to increased demolition in the coming years, despite low prices for scrap units. Nevertheless, the age distribution of the current fleet indicates that demolition will only in part balance for the addition of new tonnage. If we assume ships will be demolished by their reaching 30 years of age for European built tonnage and 25 years for Asian built ships (the difference reflecting varying construction quality and maintenance profiles) during the next five years the deep-sea fleet will still have an average net growth of 3.3% per year, even with no additional new orders.
In their most recent quarterly forecast, UK shipping consultants Drewry estimate an average annual chemical fleet demand growth to 2012 of about 3%, below most forecasts in respect of fleet growth. Hence, this should indicate a further weakening of the market for chemical tanker owners and operators. Nevertheless, there are also factors that point in the opposite direction. Stricter age and quality requirements by both regulatory bodies and customers, not least through steadily more rigorous ship vetting regimes, will limit the actual quality tonnage supply, and likely lead to more vessel demolition. More emphasis on safety and environmental issues should make customers more inclined to opt for quality tonnage and reliable owners with a strong QHSE focus. Continued chemical capacity expansion, particularly in the Middle and the Far East, and expectations of a general economic recovery in a few years’ time, will again boost demand. Closing of chemical plants may also have a positive effect on the ton-mile equation, as this will require sourcing of products from plants further away. The fleet increase further tightens the competition for skilled and motivated officers and ratings, in addition to onshore expertise, which limits the number of ships actually being able to serve the core chemical transportation market. Thus, the market outlook may after all not be as gloomy as some recent market analyses profess.
COMPANY STRATEGY AND PROSPECTS
As a leading niche player, we strive to provide safe, efficient, and cost-effective parcel tanker and tank terminal services to our customers worldwide. Besides clear operational and commercial benefits from close cooperation as between our shipping activity and our tank terminals, we consider tank terminals a stabilizing factor in the overall financial performance of the Company, as their earnings are less volatile than our shipping activities. Importantly, Odfjell strives to stay competitive and flexible with a modern, versatile and adequate fleet of vessels, adjusting to changing trade patterns through organizational nimbleness.
In general, 2008 became an “annus horribilis” in respect of the financial sector, world economic growth and for many shipping sectors. We have seen extreme volatility in a wide range of markets and we expect this to continue during 2009.
The current recession many economies are experiencing, is following the biggest liquidity boom the global economy has ever witnessed. After the biggest party, one can only expect the biggest hangover. In a shipping context, whilst large tankers and bulk carriers the last few years enjoyed boom times, our parcel tankers have comparatively done relatively poorly during this same period. Not unusual in down markets, we expect however doing relatively better than most shipping segments now going forward. This because the diversity of trade lanes and the products we transport provide some natural hedging against the negative effects of a general slowdown in demand. On the other hand, we cannot expect that our business will be immune to the crisis, and the short-term effects are difficult to assess as we seem to be navigating in “unchartered waters”. Deliveries of newbuildings will continue, and the net supply will increase in 2009, although contracting has ceased. Recycling of ships will likely be accelerated, and we also expect to see some of the new ships contracted for delayed, even not delivered at all.
The recent strengthening of the USD, lower interest rates and the declining price of bunkers are positive developments, although in the short-term the overall benefit will partly be offset by hedging positions. We do expect tank terminal results to remain stable, as a result of strong demand for storage space and a solid contract base, whilst the extra income from additional services may be lower, as throughput is reduced. Overall we are preparing for 2009 being a challenging year, with weaker operating results than in 2008.
STATEMENT OF RESPONSIBILITY
We confirm that, to the best of our knowledge, the condensed set of financial statements for 2008, which has been prepared in accordance with International Financial Reporting Standards (IFRS), gives a true and fair view of the
Company's consolidated assets, liabilities, financial position and results of operations, and that the Annual Report includes a fair review of the information required under the Norwegian Securities Trading Act section 5-6 forth paragraph.
ILIAS A. ILIOPOULOS |
IRENE WAAGE BASILI |
BERNT DANIEL
ODFJELL |
MARIANNA A.
MOSCHOU |
REIDAR LIEN
TERJE STORENG President/CEO |