Quarterly December 2011 - Odfjell

chairman’s message
ODFJELL QUARTERLY magazine
10
Laurence W. Odfjell
‘We are living in interesting times,’ my grandfather
Bernt Daniel Odfjell was prone to say
when the company was facing tough markets
or uncertainty. We are heading toward the
end of another challenging year and this is an
opportune moment to reflect upon the macro
picture and how we have been positioning
ourselves for the future. Outlook for sustainable
growth in the world economy is fraught
with uncertainty in light of the continuously
developing twists and turns of the sovereign
debt crisis in Europe (and the US), the seeming
shift of world economic power, and the
political unrest in large parts of the world.
As a global provider of transportation and
storage services, our arena is global trade,
so any impact on the demand side will only
prolong the adverse effects we have been
suffering from the supply overhang of ships.
Many argue that the global economy never
really exited the crisis of 2008/09. Of course,
there was a seeming rebound in certain sectors
during 2010, but no structural solutions
to the fundamental challenges of an emerging
new economic order (or call it reality) have
yet been put forth. As the debt crisis has (re)
entered center stage in Europe - social unrest
is increasing. This unrest will probably only
grow as unemployment levels in many mature
economies are already at worryingly high
levels. Some argue that the western world
are at the end of a mega trend of continuous
growth in prosperity since World War II. If
so, how to adjust expectations? Taking away
privileges or benefits is never popular and
is something politicians only will do as a
last resort. There should be no doubt that
austerity measures in the public sector will
hurt. They will also increasingly impact the
private sector and the so-called ‘Main Street’
economy, usually a lagging but nevertheless
predictable effect. One emerging threat is that
politicians revert to protectionist measures in
an effort to protect or promote employment
at home, thus responding to the demands
of their electorate. Of course, protectionism
would lead to reduced global trade, thus
having a direct impact on the demand for
our services.
With projections of sluggish growth at best in
the OECD countries, one would have hoped
that international bodies would lighten
the ever increasing load of new regulations
coming into force. In the long view, certainly
many of the initiatives by the EU, the US,
the IMO, etc., will arguably safeguard public
interests. However, all these initiatives come
with short term costs of implementation and
compliance, something that appears not to
be fully appreciated by eager regulators in
this challenging business environment. Who
will foot the bill? Conventional wisdom would
say that this will ultimately be paid by all of
us (so a ‘tax’ on society). Can we really afford
all of this now?
In shipping, the anemic growth of demand
combined with oversupply of ships in the
many sectors has produced a deep crisis. Trade
journals are filled with news of struggling
operators and bankruptcies. Counterparty
risk for our charterers is increasing. Are ships
being maintained to safe standards when the
owners are bleeding cash? Or what is the risk
of an operator’s ships being arrested in port?
Or performing reliably according to contract
of affreightment?
Of course, in the backdrop of the debt
crisis (which easily can translate into a full
blown banking crisis), financing of shipping
activities will become an increasingly
expensive and challenging proposition for
many operators. Needless to say, banks are
essential participants in our capital intensive
business. Even before the crisis, banks had a
large exposure to shipping by financing the
lion’s share of newbuildings, etc. Now with
equity being wiped away after years of losses,
many banks have by default become large
ship-owners, something which is tenable
for only a relatively short period. The issue
is often more complex because of how the
industry now often relies on groups of lenders
for so-called syndicated loans. The result is a
group of lenders (complicated ever further if
there are bondholders in the mix), becoming
ship-owners with potentially very different
agendas or requirements. In the absence of
a ‘group will’ or ability to write off losses,
companies are artificially kept afloat, thus
possibly also delaying any recovery in the
shipping markets. And now with counterparty
risk reemerging with gale force within the
banking world (just note how shares in banks
have fared over the last three months), how
to syndicate new loans in an environment
where you cannot readily trust your typical
fellow group lenders? It is certainly reassuring
for us not to have uncovered investment
commitments in this scenario.
As the global financial crisis evolves, we start
seeing signs that ‘the invisible hand of the
market’ (as described by Adam Smith) could
increasingly be replaced by protectionism in
the form of duties on imported goods. Never
good for trade. Never good for those of us who
live by transportation and related services.
And what is the worst part of this? There are
no quick fixes in sight to ensure sustainable
global economic growth. Our hopes are tied to
the fortunes of the increasingly important role
of the emerging markets, but these are also
suffering increasing pains of modernization.
More specifically to our particular shipping
business, the health of our chemical tanker
industry is weak after three years of freight
rates at loss generating levels. We continue
to face unprecedented challenges due to
the inefficiencies of our trade, exacerbated
by lacking shore infrastructure, high (and
volatile) fuel costs, increasingly complex vetting
regimes and the continued onslaught of
regulations.
A perfect storm is the joining of many adverse
forces. Such a storm has been the backdrop
for our activities in 2009, 2010, 2011 and
probably will be for 2012 and onwards. Last
year, we announced we would have to take
measures to secure our business in face of
turbulent waters. Our focus was to ensure
control of our own fate, by taking measures
to shore up our balance sheet, particularly to
build cash and reduce forward commitments.
In the course of a relatively short period, we
have actually turned around our position
(albeit still producing losses in the underlying
operations of shipping). We have built up a
war chest to survive a possible delay in the
recovery of our markets. We have also entered
into new partnerships that will allow us to
invest in some of the many opportunities
that appear on our radar screen. All this has
been the fruit of dedication and hard work
by many of you. I would therefore like to take
this opportunity to recognize and express
gratitude for the extraordinary efforts of many
of you in these processes.
In light of an outlook clouded by uncertainty
and therefore lacking visibility, let me end
this rather somber message by reassuring
you that we are now better fit for fight. From
a position of certain vulnerability at the end of
last year, we are now, a year later, in a position
of relative strength amongst our peers. Our
main financing is secured, we have plenty of
cash in our accounts and, importantly, we
have not taken shortcuts affecting safety in
our operations. We are, indeed, prepared for
continued interesting times ahead.
Stay safe.
www.odfjell.com