Annual Report 2006

(1)

Annual Report 2006

(2)

s

Contents

Signifi cant Events in 2006 1 This is Concordia Maritime 2 President’s Views 4 A Year of many Deliveries 6

THE MARKET

Oil Market 8 Freight Market 12 Shipbuilding Market 15 Competitors 18 Market Forces 20

AC TIVITIES

A Company with a Growing Fleet 22 Personnel and Organisation 24 Close Collaboration with Customers 26 Vessel Sisterhood 28 The MAX Concept 30 Safety and Environment 32

FINANCIAL OVERVIEW

The Share 36

Risk and Sensitivity Analysis 39

10-year Summary 42

Key Ratios 44

FINANCIAL REPORT

Board of Directors’ Report 45 Group

Income Statement 48 Balance Sheet 49 Change in Equity 50 Cash-fl ow Statement 51 Parent Company

Income Statement 52 Balance Sheet 53 Change in Equity 54 Cash-fl ow Statement 55 Notes to the Financial Statements 56

Audit Report 73

Corporate Governance 74 Board of Directors and

Senior Management 78 Information on Annual

General Meeting 80 Glossary and Defi nitions 81

(3)

s

Signifi cant

events in 2006

Net sales for the full year were SEK 381.2 (254.0) million.

Net profi t after tax was SEK 51.9 (SEK 57.2 million, including a profi t of SEK 56.2 million on the sale of ships) and exchange rate differences of SEK 4.3 (-52.6) million.

Profi t per share was SEK 1.09 (1.20).

Newbuilding program according to plan.

Concordia Maritime’s newbuilding program proceeded according to plan during the year. Three new vessels were delivered at the same time as a further four P-MAX vessels were ordered.

New 5-year charter agreement signed with TOTAL In March, an additional time-charter agreement was signed with the French oil com- pany TOTAL. The charter covers the Stena Perros with delivery set for the beginning of 2008.

Two-year charter agreement signed with Lukoil. In June, a 2-year time-charter agreement was signed with the Russian company Lukoil for the two V-MAX VLCCs Stena Vision and Stena Victory. These vessels have been chartered from

Arlington Tankers Ltd. until the end of 2009 and with the new charters, Concordia Maritime has secured employment for the two tankers for the whole period.

In conjunction with the scheduled dry- docking of the Stena Vision, the vessel’s reduc- tion gear was found to be damaged. Repairs, including the manufacture of new parts, are in progress and will be completed in a couple of months’ time. For the last six months, however, the vessel was employed until quite recently as a fl oating oil storage facility as well as undertaking a short voyage. No similar damage was found on her sister ship when she was dry-docked.

After a dispute lasting several years, Concordia Maritime has been ordered to pay USD 3.6 million relating to the sale of a vessel in 2000. Concordia Maritime will also have to pay interest compensation to the opposite party. In 2006, costs amounting to about SEK 25 million were charged to the operating result and about SEK 5 million to the fi nancial net.

1) Föreslagen utdelning

2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 Net sales, MSEK 381.2 254.0 354.0 649.7 768.6 1,334.6 1,327.6 773.6 1,102.9 1,114.5 whereof result from the sale of ships, MSEK — 56.2 646.6 –15.1 11.1 1.5 16.6 — — —

EBITDA, MSEK 38.7 –1.3 795.5 177.5 89.5 454.4 382.9 57.1 297.7 329.4

Result after net fi nancial items, MSEK 52.5 42.7 740.2 35.1 –142.4 251.9 227.7 –72.0 114.0 156.3

Net result, MSEK 51.9 57.2 740.2 77.1 –148.9 231.3 207.3 –62.5 117.3 157.9

Investments, MSEK 767.2 492.8 86.3 61.6 — 513.6 351.1 295.7 259.3 5.6

Equity ratio, % 73 93 94 73 51 51 48 38 43 34

Equity per share, SEK 34.09 37.10 33.87 21.51 24.16 33.62 26.67 20.03 20.85 18.77

Return on capital employed, % 5 6 49 3 –4 12 14 –2 13 17

Dividend as percentage of profi t, % 92 83 19 31 0 12 22 0 12 17

Net result per share, SEK 1.09 1.20 15.51 1.62 –3.12 4.85 4.47 –0.96 2.79 3.68

Dividend per share, SEK 1.00¹⁾ 1.00 3.00 0.50 — 0.60 1.10 — 0.50 1.00

Share price on accounting date, SEK 55.00 43.00 34.80 17.50 11.00 16.00 21.50 11.80 11.50 23.50

Forecast Outcome 2006 Forecast 2007

SEK 75 million before tax corresponding SEK 82.5 million before expenses of a non-recurring nature SEK 80 million,

to SEK 1.56 per share SEK 52.5 million profi t before tax SEK 1.68 per share

Key ratios

1) Proposed dividend

(4)

What we transport

The change in business activities implemented in recent years has resulted in a shift in focus from the transportation of crude oil to the transportation of refi ned petroleum products. The 12 tankers ordered in the last few years, and which are now in the process of being delivered, are all designed primarily to transport refi ned petroleum products such as petrol, diesel fuel and aviation fuel. In addition to our own vessels, we have also chartered two crude oil tankers from the US shipping company Arlington Tankers. At the end of 2006, Concordia Maritime had six vessels at its disposal.

A continuing strong market

The strong tanker market continued in 2006.

Among the factors driving the very strong development of the market in recent years are a strong global economy, high demand for oil and regional imbalances between the supply and demand for petroleum.

Our customers

Concordia Maritime’s customers include some of the world’s largest oil and chemical companies.

Customer relations are characterised by partner- ship, cooperation and a long-term perspective.

Read more about our customers on page 26.

Why our customers choose us

At Concordia Maritime, a deep understanding of the individual customer’s business activities is combined with cutting-edge competence in the development and design of ships, shipbuilding, manning, chartering and commercial operation. The result is safe and effi cient transportation, which generates value for both parties.

Our cooperation partners

Concordia Maritime conducts its business activities in close cooperation with several companies in the Stena Sphere. This means that the company’s business activities can be conducted cost-effectively at the same time as its customers have access to the Stena Sphere’s knowledge base. Read more about Concordia Maritime’s partners on page 25.

This is

Concordia Maritime

Concordia Maritime is an international tanker shipping company, which develops, builds, mans and charters vessels to customers with exacting demands on transport economy, fl exibility and safety. The company’s focus is on the transportation of refi ned petroleum products such as petrol, diesel fuel and aviation fuel.

Concordia Maritime was established in 1984 when its Series B share was listed on the Stockholm Stock Exchange. Its head offi ce is located in Gothenburg, Sweden.

Business concept and vision

Business concept To provide our customers with safe and cost-effi cient tanker transportation based on innovation and performance.

Vision To be our customers’ fi rst choice for safety, innovation and performance in effi - cient tanker transportation, which will result in good profi tability, steady growth and fi nancial stability.

Strategy in brief

• To continue to develop Concordia Maritime as a partner of choice in transportation of oil and petroleum products.

• To continue to identify the market’s need for effi cient transportation and thereafter develop vessels and logistic solutions based on transport economy, fl exibility and a well-developed environmental safety philosophy.

• To utilise our strong fi nancial position to do new business with the right timing.

• To continue to take advantage of the unique competence existing in the Stena Sphere with respect to market know-how, shipbuilding and ship operation.

COM PA N Y OV E RV I E W

(5)

A continuing strong market Why our customers choose us

Growth

Goal At least 10% per year, while maintaining profi tability

Goal attainment 1997–2006 Average annual growth of 21%

Our goals

A small company in a large context

Flexible and safe transportation with good transport economy

Customer’s value chain Profitability Needs

Stena Teknik

Newbuilding and conversion projects. R&D and procurement

Northern Marine Management

Manning, operation and maintenance

Concordia Maritime

Stena Bulk

Chartering, marketing and commercial operation

Concordia Maritime has a small number of shore-based employees and sales of SEK 381.2 million. How is this possible? Concordia Maritime owns its vessels, but utilises service suppliers for chartering, commercial operation, manning and technical questions.

Profi tability

Goal Return on equity of at least 12%

Goal attainment 1997–2006 Average return on equity of 13.5%

Equity ratio

Goal At least 50 per cent over a business cycle Goal attainment 1997–2006 Average of 59.8%

(6)

Concordia Maritime’s business activities developed positively in 2006. During the year, we took delivery of a further three P-MAX tankers. The deliveries proceeded according to plan and the vessels have exceeded expectations, functioning very well in our customers’ transport systems. It is very encouraging that TOTAL, which has now had the fi rst two P-MAX tankers for about a year, chose to sign a 5-year charter agreement with us for a further vessel, which will be delivered at the beginning of 2008.

With our order for a further four P-MAX tankers during the year, we now have a fl eet of ten vessels of this very modern, effi cient and attractive ship type under construction. These vessels will form the basis of the company’s activities for many years in the future.

Strong market and large order book 2006 proved to be yet another strong year for tanker shipping with only marginally lower freight rates compared with 2005.

Despite deliveries of large volumes of tonnage, freight rates were not affected to any great extent – higher demand absorbed the tonnage.

As a result of the strong market, ship- owners all over the world continued to be very optimistic and 2006 was something of a record year when it came to orders for tankers. The order book now comprises 35 per cent of the existing fl eet. This is a lot, but it is worth noting that the current imbalance is nothing like the situation at the beginning of the 1970s, when a dispro- portionately large fl eet had been built up over a number of years. As a result of the oil crisis in 1973, a large part of this fl eet was forced into layup and withdrawn from service. Tanker shipping suffered the nega- tive effects of this for the next 25 years.

2010 – a key year

IMO’s ban on the transportation of oil by single-hull vessels will come into force in

2010. There are still many single-hulled vessels in service today and these will be forced out of the market. A lot of new refi n- ery capacity will also come on line in 2010.

Major investments are currently being made in new refi neries, mainly in the Mid- dle East and Asia. Some of the refi neries being expanded are closer to the consumer areas, e.g. in Asia, while the increased production of refi ned petroleum products in the Middle East will be shipped westward or eastward, which will result in long transport distances.

In Europe and the US, the little work being done on expanding capacity is mainly in the form of modernisation of existing refi neries.

Taken as a whole, this is leading to changes in trade fl ows, higher demand for transportation and a greater dynamic in the market. Moreover, if there is continued rea- sonable growth in the economies all over the world, the prospects are good for a bal- anced product tanker market in 2010.

Concordia well placed

Until then, during the period 2007 to 2009, we anticipate a generally speaking weaker market, not as a consequence of weaker demand but because of an increase in capacity in the form of new vessels.

In this scenario, Concordia Maritime is in a very good position thanks to a solid base in the form of fi xed charter agreements, which translates into a secure

P R E S I DE N T ’ S V I E W S

Our strong balance sheet and stable cash fl ows give us freedom of action.

“

Concordia Maritime

well-prepared for the future

(7)

fi nancial position with secure cash fl ows for our existing vessels as well as for the vessels to be delivered in 2007/2008. Furthermore, a weaker market could generate new business opportunities.

When other players perhaps feel uncer- tain about the future, our strong balance sheet and stable cash fl ows give us freedom of action.

A strong seagoing organisation Concordia Maritime’s seagoing organisation is expanding at the same time as the

vessels on order are delivered. Just over 150 offi cers and ratings are currently employed on our vessels. When all the vessels have been delivered, about 500 persons will be working on board. Recruiting, training and retaining competent crews is one of the most critical success factors in our business.

It is also one of the greatest challenges since the demand for experienced and qualifi ed offi cers and ratings has increased dramatically as a result of strong markets in practically all segments of shipping. Together with our ship manager Northern Marine

Management in Glasgow, we will intensify our efforts and employ even more resources in this area in the future.

Our immediate task

We will now ensure that the remaining vessels on order are delivered according to plan and deployed as well as continuing to consolidate our cash fl ows and fi nancial position.

We are ready to tackle new business deals and projects, e.g. new projects based on the MAX concept, but we are also prepared to meet completely new types of challenges. Parallel with this, we will continue to develop and extend our cooperation with our current customers. Our goal is, of course, to be able to contribute to effectivising their transport systems still further. Continuing to supply our customers with value is the best investment we can make for continued success in the future.

Gothenburg, March, 2007

Hans Norén, President

Concordia Maritime

well-prepared for the future

(8)

A year of many deliveries

The Stena Primorsk is the only tanker of its size to have anchored in the Sound in Stockholm. The fact that she also sailed there under her own steam – without the assistance of tugs – bears witness to the manoeuvra- bility of the P-MAX design in narrow channels.

DE L I V E RY Y E A R

(9)

2006 was a year of many deliveries for Concordia Maritime. During the year fi ve new vessels were named: three P-MAX tankers and two Panamax tankers.

The Stena Primorsk was the second vessel to be delivered and named during the year. The vessel was named in an impressive ceremony by Her Majesty Queen Silvia of Sweden in the Sound in the middle of Stockholm on 9 June. In conjunction with the naming ceremony, Concordia Maritime also arranged a capital market day with several lectures in the fi elds of shipping, oil and the environment.

Her Majesty Queen Silvia of Sweden, Dan Sten Olsson and Jane Olsson Thorburn.

Stena Provence

Stena Primorsk

Stena Performance

Stena Poseidon Five vessels named during the year

Vessel Naming date Godmother

Stena Provence 25 Feb. Mrs. Claire de Lavernette Stena Primorsk 9 June H.M. Queen Silvia Stena Performance 5 Oct. Mrs. Mary Neal Uhles Stena Poseidon 16 Nov. Mrs. Ainomaija Haarla Palva 16 Nov. Mrs. Maarit

Toivanen-Koivisto

(10)

T H E M A R K E T

Oil is the life blood

of modern society

High energy content combined with relative ease of transport and storage have made oil the leading global energy raw material. Today, oil and petroleum products are the single largest commodity group in international trade.

Since it became possible to extract oil using commercially viable methods in the middle of the 19th century, oil has played a central role in building up modern society. The development of the car industry and aviation made the 20th century

“the oil century”. Between 1965 and 2005, total global consumption of oil and petroleum products tripled from about 30 million barrels of oil per day to more than 84 million barrels per day.

Single largest commodity

Today, oil in different forms is used for heating, as fuel and in the manufacture of widely varying products, everything from plastic and paint to medicine. Although global dependence on oil is decreasing rela- tively speaking, oil still satisfi es about 40 per cent of the total global energy requirements.

Among the factors that have made oil the leading energy raw material it is today is its high energy content and the fact that oil is easy to transport and store.

The volume of oil transported across the oceans is larger than that of any other commodity.

OPEC – a central player on the oil market During the fi rst few decades of the 20th century, the oil industry was dominated by

a small number of large oil companies, the so-called “Seven Sisters”.¹⁾ These companies’ control of the oil supplies was based on oil concession agreements signed with the governments in the oil-producing nations, mainly in the Middle East. OPEC, Organization of the Petroleum Exporting Countries, was formed by the oil exporting countries Iran, Iraq, Kuwait, Saudi Arabia and Venezuela in 1960. The reason for this was growing dissatisfaction with how the oil revenues were distributed. OPEC’s power became visible for the fi rst time during the Yom Kippur War between Israel and a number of Arab states in October, 1973, when the price of oil rose sharply after the organisation’s decision to halt deliveries of oil to, among others, the US and Europe.

Even if oil production in other parts of the world has increased sharply since the 1970s, OPEC still accounts for more than 40 per cent of the total global production.

In terms of oil reserves, this share is even larger; the cartel controls more than 75 per cent of the world’s total oil reserves.

The oil market in 2006

The demand for oil continued to rise in 2006 and was 84.3 million barrels per day, an increase of 1.2 per cent compared with 2005. In the US and Europe, demand fell

1) Standard Oil of New Jersey (Esso), Royal Dutch Shell, British Anglo-Persian Oil Company (APOC), Standard Oil of New York (Socony), Standard Oil of California (Socal), Gulf Oil, Texaco.

(11)

21.7 25.1 11.7

31.0 7.1 61.9

12.0 3.4 9.5

Reserves, % Production, % Consumption, %

Total reserves 1,200,700 million barrels Total production

81,088,000 barrels per day

Total consumption 82,459,000 barrels per day 16.5 29.5 5.0

North America

9.0 5.8 8.6 Central and South America

Europe and Eurasia

Middle East

Africa

9.8 29.1 3.4 Pacific Asia

Source: BP Statistical Review of World Energy, June, 2006.

Production Consumption Reserves

Region % Change 85–05 % Change 85–05 % Change 85–05

North America 16.5 –7.8 29.5 34.2 5.0 –41.4

Central and South America 9.0 74.8 5.8 52.5 8.6 64.5

Europe and Eurasia 21.7 3.5 25.1 –8.5 11.7 78.8

Middle East 31.0 91.1 7.1 95.2 61.9 72.2

Africa 12.0 80.7 3.4 61.6 9.5 100.3

Pacifi c Asia 9.8 30.0 29.1 128.9 3.4 2.9

The global oil fl ows From the oilfi elds, the oil is transported by crude oil tankers to refi neries closer to the end consumers. The oil is usu- ally transported to Europe via the Suez Canal, while it is shipped to the US either westwards, across the South and North Atlantic, or east- wards across the Indian Ocean.

Source: Sjöfartens bok 2005

The largest oil producers, %

Saudi Arabia 13.5

Russia 12.1

USA 8.0

Iran 5.1

Mexico 4.8

The fi gures are based on percentage of total global production, consumption and proven reserves. Source: BP Statistical Review of World Energy, June, 2006.

The largest oil-producing countries Oil in the world

Five largest oil consumers, %

USA 24.6

China 8.5 Japan 6.4

Russia 3.4

Germany 3.2

Five largest oil reserves, %

Saudi Arabia 22.0

Iran 11.5 Iraq 9.6

Kuwait 8.5

United Arab Emirates 8.1

(12)

T H E M A R K E T

somewhat while demand in e.g. China and India rose sharply. During the year, Asia overtook Europe as the world’s second largest oil consumer after North America.

The average price of oil was USD 65 per barrel, 20 per cent higher than in 2005. In the middle of April, the price of oil broke through the USD 70 per barrel level for the fi rst time ever. During the spring, the price dropped only to reach a new record price of about USD 80 per barrel in August. Since then, the price has once again fallen and was around USD 60 per barrel at the end of the year.

Threat of disruptions driving up oil price The fl uctuations in the price of oil are largely due to the fact that total global production and refi ning capacity are severely stretched. During the “oil crises” in the 1970s, large price hikes resulted in lower demand. For the oil-producing countries in OPEC, this meant that much of their production capacity was idle for long periods.

At the end of the 1990s, history repeated itself when OPEC decided to raise production capacity at the same time as Asia slid into a deep recession and the demand for oil fell once again. These two events have contributed to a large degree to a cautious attitude towards investments in overcapac- ity. High oil prices in recent years are largely a consequence of high global demand for oil combined with insuffi cient investment in new production capacity.

Shortage of refi nery capacity

To this can be added a new phenomenon: a shortage of refi ning capacity. As a result of tough environmental regulations, extensive commitments and high investment costs, new refi neries are no longer being built at the same rate as oil consumption is increasing. Taken as a whole, this means that the demand for oil and petroleum products has outstripped supply in recent years.

When demand is high and extraction capacity is limited, any threat of disruption in the global supply of oil tends to drive up

the price of oil. In 2006, the price was affected by several oil-related geopolitical events, including disturbances in Nigeria and problems in reaching full production in Iraq. In addition, there is the confl ict between Iran and the UN over nuclear power inspections. Iran accounts for about 5 per cent of all oil extraction and it is estimated that the size of its oil reserves is second only to those of Saudi Arabia.

Oil exchange

The markets for petroleum products are connected by several international oil exchanges, where a large proportion of the prices of crude oils and petroleum products between buyers and sellers is determined.

The two largest oil exchanges are the London International Petroleum Exchange (IPE) and the New York Mercantile Exchange (Nymex).

The oil market is similar to other international commodity and fi nance markets.

Most of the trade on the exchanges con- sists of forward quotations and option contracts. The volume is several times larger than the physical deliveries of crude oils and products. Forward quotations are dominated by contracts for immediate delivery or with a validity of a month or so.

How long will the oil last?

In recent years, the debate about how long the oil will last has intensifi ed and has been presented as an argument for the price of oil remaining high in the future.

An important issue in the debate has been when global production will reach its maximum, i.e. Peak Oil. This is the point in time after which maximum crude oil production will gradually decline until the oil recoverable from a cost and environmental perspective has run out. The fact that Peak Oil will occur sooner or later is incontestable since oil is a fi nite resource.

When this will happen is, however, the subject of intense debate.

The discovery of new oil deposits reached a peak at the beginning of the

1960s. Oil production in several countries outside OPEC and the former Soviet Union reached its peak in about 2000.

This was when, for example, the North Sea reached its maximum production of 6 million barrels per day and is now declining sharply.

Estimates of when Peak Oil will occur vary between different players. The OECD’s expert body IEA, the Interna- tional Energy Agency, believes that the peak will occur between 2020 and 2030 while others, including BP – British Petro- leum – think the peak will be reached between 2015 and 2020. The expert group ASPO, The Association for the Study of Peak Oil and Gas, is much more pessimis- tic in its assessment of the supply of un- exploited oil reserves and expects the peak to be reached before 2010.

Transportation still necessary

Irrespective of one’s position in the debate about Peak Oil, it is obvious that most of the oil, both today and in the future, is not where the majority of the consumers are.

This means that the demand for transportation will continue to be large in the future.

(13)

(14)

T H E M A R K E T

Somewhat weaker freight market The market for the transportation of oil

and petroleum products continued to be strong in 2006, although it showed signs of weakening. Compared with the previous year, freight rates on both the spot and the period markets were somewhat lower.

One of the main reasons for the falling freight rates was a larger supply of vessels.

In the record year 2004, the demand for oil transportation rose about 7 per cent and total tonnage increased approximately 4 per cent. In 2005 and 2006, the opposite was the case: demand rose about 4 per cent and total tonnage increased approximately 7 per cent.

Large fl uctuations in the market The year began strongly with high freight rates for both oil and refi ned petroleum products. As a whole, however, the fi rst and second quarters were characterised by a sea- sonal downturn, high stock levels and warm weather in the US. During the third quarter, the market rebounded largely due to increased imports to the US where oil

stocks were being replenished in prepara- tion for the approaching hurricane season.

Geopolitical concern about e.g. the situation in the Middle East drove up demand still further. During the fourth quarter, freight rates fell as a result of fewer hurri- canes than expected, a mild climate and unusually high stock levels.

Product tanker market

The demand for transportation of refi ned petroleum products continued to be high during the year, driven primarily by large- scale US and Asian imports.

A sharp increase in the number of vessels, mild weather and the absence of hur- ricanes in the Gulf of Mexico meant that the freight rates did not reach the same high levels as in 2005, when the strong market was largely due to the two hurri- canes Katrina and Rita, which knocked out a large part of the refi nery capacity in the US. Higher imports of petrol, aviation fuel and similar products resulted in a sharp upswing in the whole product tanker seg-

ment, which, in turn, generated a high demand for product tankers.

Even though refi nery capacity was by and large restored in 2006, US import needs remained at a high level during the year.

Imports of products such as petrol increased by a total of 12 per cent. In China, the demand for oil and petroleum products also continued to rise with Chinese imports increasing 14 per cent during the year.

For the year as a whole, market rates on the spot market for transportation of refi ned petroleum products were slightly lower than in 2005. Freight rates on the spot market fl uctuated between USD 7,000 and USD 35,000. In the period market, the average freight rate for a 3-year charter contract was around USD 22,000 (20,000) per day.

Continued historically high levels The downturn during the year must be compared with the extremely strong market in recent years. There has been a very high demand for transportation of oil and petroleum products in the last four years. This is

Product tanker (MR) freight rates VLCC freight rates

VLCC freight rates

Sep Nov July

May Mar Jan 120

90 60 30 TUSD per day

2006 2005 150

Product tanker (MR) freight rates

Sep Nov July

May Mar Jan 32 24 16 8 TUSD per day 40

2006 2005

03 04 05 06 02

00 01 99 98 80 60 40 30 TUSD per day 100

03 04 05 06 02

00 01 99 98 24 18 12 6 TUSD per day 30

Source: Clarkson Source: Clarkson

(15)

The price fl uctuations on the spot market are largely due to supply and demand in the oil energy sector being more or less in balance.

Put simply, this means that the oil produced is consumed, not stored. A state of equilibrium means that the effects on the freight market and its pricing of small disruptions in the pro - duction, and its pricing, refi ning and distri bu- tion chains are both rapid and substantial. For example, transportation distances are longer, which, in turn, results in larger transportation requirements.

Energy market in balance

a consequence of an expanding world economy, a global boom and high demand for oil. In combination with regional imbalances between supply and demand for different petroleum products, this has resulted in a high demand for transport capacity accompanied by steeply rising freight rates.

Like oil prices, the price of transporting oil and petroleum products in recent years has reached record-high levels. Since 2002, the average freight rates on the spot market have risen sharply, both for large tankers and product tankers. In the last four years, the average freight rate for a product tanker was USD 23,000. This can be compared with the average during the 1990s, just under USD 12,000 per day. The highest freight rates were recorded at the end of 2004, when they reached about USD 50,000 per day for a product tanker and USD 200,000 for a VLCC.

Three contract types

The two dominating charter types in tanker shipping are spot and time charters,

which can be likened to the banks’ fl oating and fi xed interest rates. In the spot market, the price can rise and fall very sharply over a short period. In the crude oil segment, freight prices can vary almost 100 per cent in a single day. In the product tanker market, there is less volatility. For the shipping companies, it is thus essential to have charterers with an instinctive feel for how the market is developing. The market is infl uenced solely by supply and demand, which means that if there is a shortage of available vessels and a large demand for transportation, freight rates rise and vice versa.

On the time charter market (also called the “period market”), vessels are instead contracted for longer periods, normally between one and three years, at a price determined in advance. There are longer contracts, but they are rare.

The time-charter market refl ects the economic trend anticipated by the parties in a somewhat longer perspective.

The majority of the world’s large tankers are employed on the open spot market.

Generally speaking, it can be said that shipping companies are reluctant to tie up tonnage for long periods when prices are high on the spot market.

In addition to spot and time charters, there are also so-called COAs (Contract of Affreightment), which means that the contract is valid for a specifi c length of time and the shipping company assumes respon- sibility for a specifi c part of the customer’s logistics solution. In other words, instead of offering a specifi c vessel, the shipping company offers a service, that is, to transport a certain quantity at a price determined in advance or at the market price.

(16)

T H E M A R K E T

(17)

03 04 05 06 02

00 01 99 97 98 40 30 20 10 MUSD 50

Newbuilding prices, MR

The tanker fl eet and the shipbuilding market An important component of pricing on

the tanker market is the supply of vessels. The size of the fl eet is, in turn, dependent on the balance between newbuildings delivered and the scrapping rate of older tonnage. When the demand for tonnage is high, the number of newbuildings produced tends, generally speaking, to increase at the same time as the scrapping rate decreases. When, instead, demand is low, the opposite occurs.

Still many new orders

The freight market, which continued to be strong in 2006, also made its mark in the new order statistics. The global order book continued to grow for the fourth consecu- tive year. After a temporary downturn during the second half of 2005, the volume of new orders increased again in 2006. In total, the shipyards’ order books grew 20 per cent and at the end of the year con-

tained 1,895 tankers totalling 136 million deadweight tons. In relation to the world fl eet, this is equivalent to a record 38 per cent.

There was also considerable activity in the second-hand market. Normally, this market follows the trend and price level in the newbuilding market. In 2006, activities in the second-hand market increased in terms of both volume and value. During the year, some 150 product tankers changed owners, an increase of about 30 per cent compared with 2005.

Only limited scrapping

The scrapping rate is very dependent on three factors: the age of the vessels, the economic climate in the freight market and new laws and regulations. A consequence of the high freight rates is that the scrapping rate in recent years has been very low and this was also the case in

2006. During the year, vessels totalling 2.7 million deadweight tons were scrapped, about 35 per cent less than in 2005. This downward trend is due to the combination of a good freight market and the fact that many of the vessels built in the 1970s have already been scrapped or withdrawn from service.

Record-large world fl eet

A large volume of new orders together with low scrapping levels meant that the total world fl eet continued to grow in 2006. At the end of the year, the tanker fl eet con- sisted of about 4,200 vessels totalling 360 million deadweight tons, an increase of more than 5 per cent compared with the previous year.

With the vessels ordered in recent years beginning to be delivered, the fl eet will continue to grow in the years ahead. In 2007 and 2008, the product tanker fl eet is

4,500 4,200 3,900 3,600 3,300

3,000 98 99 00 01 02 03 04 05 06 07 Total tanker fleet, number

1,800 1,700 1,600 1,500 1,400 1,300 Product tankers, number

Total fleet Product tankers

*

*^Forecast

Trend of tanker fl eet Newbuilding trend by ship type

0 15 30 45 60

VLCC Suezmax

02 03 04 05 06

Panamax MR

Aframax 75

Mill. dwt

Source: Clarkson Source: Clarkson Source: P.F. Bassoe

(18)

T H E M A R K E T

50 40 30 20 10 0

01 02 03 04 05 06 00

99

98 07

Mill. dwt

MR VLCC

Order book

The growth in shipbuilding capacity in recent years has, in principle, taken place exclusively in South Korea and China. Although productivity is still far higher in South Korea, China is expected to account for the greater part of growth in the future. In recent years, the shipbuilding industry in China has expanded very heavily.

Largest shipbuilding nations in 2006

Country 1. South Korea 2. Japan 3. China 4. Germany 5. Taiwan

mill. dwt % 92.3 86.2 52.4 4.1 3.3

Order book as a percentage of the existing tanker fl eet expected to grow a further 10 and 8.5 per

cent, respectively. In 2010, growth will fall off as a result of IMO’s decision to ban single- hull vessels. As a result, the new vessels will in part replace the vessels phased out.

Increasingly large vessels

Not only will the fl eet consist of more vessels in the future, the vessels themselves will also be larger. The product tankers currently being built are on average 5 per cent larger than the existing vessels.

Shipyard capacity increasing In recent years, the growth in the shipbuilding industry has been as high as it was during the period immediately after World War II. Between 2003 and 2006, the vessels in the shipyards’ order books com- prised as much as 20–30 per cent of the total world fl eet. At the end of 2006, all available shipbuilding capacity was in principle tied up until after the end of 2009.

At present, however, shipbuilding capacity is expanding at a rapid rate. Growth is fastest in China where existing shipyards

are being enlarged and new yards built at a very rapid rate. In the last fi ve years, the shipbuilding industry has grown 25 per cent per year on average. If this trend con- tinues, China will overtake Japan in the next couple of years as the second largest shipbuilding nation in the world. The Chi- nese government’s goal is for China to be the largest shipbuilding nation by 2020.

Newbuilding prices still high

As a consequence of the increased demand for vessels, both yard and second-hand prices have rocketed. Between 2002 and 2006, the price of a new MR vessel in - creased by an average of more than 80 per cent. Prices continued to rise in 2006, although not as rapidly. At the end of the year, the price of a new MR vessel reached a new record level of about USD 46.5 million, an increase of about 3 per cent compared with 2005. How prices will develop in the future will depend partly on the future demand for transport capacity and partly on the rate at which the yards increase their capacity.

03 04 05 06 07 02

00 01 99 98 25 20 15 10 35

%

30

Source: Clarkson Source: Clarkson

Source: Sjöfartens bok 2006

(19)

The tanker shipping company’s revenues

Tankers are employed either on the spot market, i.e. they are chartered out for one voyage at a time, or by means of different types of contracts.

These contracts can vary in length, from a few months to several years. A shipping company, which has its ships solely on the spot market, is exposed to market downturns, but can also bene- fi t immediately from the often rapid market upswings. A shipping company, which has its vessels signed to charters, has secured its revenue level (and thus its cash fl ow) and is not affected by short-term fl uctuations in the market. A combination of employment on the spot market and charters is not unusual. Additionally, a commission to the chartering agent is deducted. This commission is normally based on a percentage of the freight or the hire.

… and costs

Apart from voyage costs (fuel consumption, port dues), The largest cost a large-tanker shipping company has is normally its vessels’ capital, voyage and daily running costs. The capital cost, depreciation and interest payments, can vary considerably depending on the company’s capital structure and debt equity ratio. Voyage costs consist of fuel consumption and port dues. The vessels’ daily running costs include costs for crews, insurance, periodic (dry-dockings) and day-to-day maintenance and repairs. The quality of the ships and how they are maintained by their crews have the largest impact on the daily running costs. A major factor affecting profi tability is the level of control the shipping company has over the daily running costs.

Timing

Ship prices, both of second-hand tonnage and newbuildings, fl uctuate together with fl uctuations in the freight market and the shipbuilding market. Timing is thus extremely important and has a large impact on the ship’s capital costs and thus the shipping company’s profi tability over a long period of time. As a consequence of this, most shipping companies’ business concepts also include purchases and sales.

(20)

T H E M A R K E T

Competitor overview – a selection of colleagues in the industry

Number = Owned + chartered + ships on order Age = age of existing fl eet DWT = Existing vessels + ships on order

Average age Refi ned Natural Refi ned Market value, USD

Company Country No. of ships Ships on order on fl eet Crude oil products gas gas DWT Ownership form Web site January 24, 2007

Concordia Maritime Sweden 14 8 1.83 1,427,165 Public (Stockholm Stock Exchange) www.concordia-maritime.se 324,391,212

Broström Sweden 74 12 8.3 1,793,914 Public (Stockholm Stock Exchange) www.brostrom.se 646,598,880

D/S Norden Denmark 38 18 2.75 1,860,330 Public (Copenhagen Stock Exchange) www.ds-norden.com 1,989,580,437

Frontline Bermuda 82 8 9.92 19,064,466 Public (Oslo Stock Exchange and New York Stock Exchange) www.frontline.bm 2,415,356,455

General Maritime Corp. USA 21 3 8.94 2,659,434 Public (New York Stock Exchange) www.generalmaritimecorp.com 1,143,641,077

Maersk Tankers Denmark 96 44 2.82 8,040,403 Part of Maersk A/S, Public (Copenhagen Stock Exchange) www.maersktankers.com 42,582,661,430

OMI USA 42 0 3.07 2,865,181 Public (New York Stock Exchange) www.omnicorp.com 1,324,825,905

OSG USA 136 31 9.97 13,537,010 Public (New York Stock Exchange and Pacifi c Stock Exchange) www.osg.com 2,254,888,867

Teekay Canada 135 24 7.3 13,815,621 Public (New York Stock Exchange) www.teekay.com 3,221,180,512

Top Tankers Greece 24 0 13.21 2,451,320 Public (New York Stock Exchange) www.toptankers.com 133,248,253

Torm Denmark 142 56 6.76 6,425,688* Public (Copenhagen Stock Exchange and Nasdaq) www.torm.com 2,378,258,149

Market segment

(21)