Odfjell SE Annual Report 2012

FINANCIAL RISK MANAGEMENT
AND SENSITIVITIES
With the global market as its arena, Odfjell is exposed to
an infinite number of risk factors. Our financial strategy
shall be sufficiently robust to withstand prolonged adverse
conditions, including long-term downturns in our markets
or challenging conditions in the financial markets. Odfjell
adopts an active approach to managing risk in the financial
markets. This is achieved through funding from diversified
sources, maintaining high liquidity or loan reserves,
and through systematic monitoring and management
of financial risks related to currencies, interest rates
and bunkers. Hedging instruments is used to reduce the
Company’s exposure to fluctuations in the above mentioned
financial risks. At the same time, it limits Odfjell’s upside
potential from favorable movements in these risk factors.
The Company also closely monitors the risk related to
market valuation of the hedging instruments and the
effect this has on the equity ratio.
EARNINGS
Earnings within the chemical tanker markets are less
volatile than in many other shipping segments as these are
niche markets with specialised tonnages. The diversity of
trade lanes and the products we transport provide some
natural hedging against the negative effects of a general
slowdown in demand. Our time charter earnings are influenced
by external factors such as global economic growth,
the general ship-freight market, bunker prices and factors
specifically related to the chemical tanker trade, such as
cargo type and cargo volume, trading pattern required by
our customers, contract and spot rates and our operational
efficiency. Time is of the essence, and optimal utilisation
of the fleet and an expedient composition of cargoes, with
minimal time in port, is of vital importance in order to
maximise time charter earnings.
The single largest cost component affecting time charter
earnings is bunkers. In 2012 this amounted to more than
USD 318 million (59.8% of voyage costs). A change in the
average bunker price of USD 100 per tonne equals about
USD 54 million per year (or USD 1,832 per 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 2012
the Company had hedged about 20% of our 2013 bunker
exposure, through swaps and options at an average price
of about USD 546 per tonne.
Sensitivity analyses show that a change in time charter
earnings of USD 1,000 per day for our chemical tankers (a
roughly 5% change in freight rates) will impact the pre-tax
net result by approximately USD 26.5 million. The Company
is not currently engaged in the derivative market for Forward
Freight Agreements.
Tank terminal activities have historically shown more stable
earnings than our shipping activities. With the issues facing
Odfjell Terminals (Rotterdam), 2012 was an exception to this.
The operating result in this segment for 2012 was negative
USD 8 million. A substantial part of the tank terminal costs
are fixed costs and the main drivers for earnings within a
tank terminal are the occupancy rate, the volume of cargoes
handled through and by the terminal, and operational
efficiency.
INTEREST RATES
All interest-bearing debt, except debt borne by tank terminals
outside the USA, is denominated in USD. Interest
rates are generally based on USD LIBOR rates. With our
current interest rate hedging in place, about 25% of our
loans are on a fixed rate basis. In order to reduce the
volatility of the net result and cash flow relating to changes
bunkers (3.5% barges rotterdam)
interest rates (usd 3 month libor)
USD/TONNES
800
700
600
500
400
300
200
100
0
03 04 05 06 07 08 09 10 11 12 13
7%
6%
5%
4%
3%
2%
1%
0%
03 04 05 06 07 08 09 10 11 12 13
110
odfjell annual report 2012