Company Magazine for the Odfjell Group - March 2005

Chairman’s Message
Building sophisticated stainless steel
chemical carriers is not for every shipyard.
Our friends in Poland, Stocznia
Szczecinska, have done it for 30
years. In 1975 we received the first
one, the Bow Fortune. Our twentieth,
and the fourth one in the current
program, the 39,900 tdw Bow
Sky will be delivered mid April. The
yard is solidly booked with container
ships and other vessels, but inbetween,
fortunately, during the
next two years or so, they will still be
able to deliver to us another four
vessels. We even have the option of
two more, with delivery in 2009.
However, the price for those ships is
yet to be determined. Due to the low
dollar and today’s high price of
stainless steel etc., the current 2009
newbuilding price is around USD 100
million per vessel. That’s a tall order
so to speak. But such are today’s
replacement realities.
So why tell you this The fact is ours
is a capital intensive service industry,
and one that is exceedingly difficult
to predict. The landscape of the
chemical industry is changing. We
have to try to factor in all these
changes. Whilst our ships are mobile
and flexible, even so we can never
escape the basic law of supply and
demand. What will the market be in
2009 Nobody has the answer; we
certainly do not. As a company, what
we do know is that we can hardly
stand still and, that two or three
large new ships are needed each year
for us just to stand still. Yes, another
tall order, you will fully well realize.
But if we wish to maintain our
position, that’s what it takes.
We need to improve on our overall
performance – otherwise we will not
have the cash to continue to invest in
new ships, and our position in the
market and our ability to serve customers
will decline. Put differently, in
our case we must more than double
our 2004 bottom line result (USD 86
million) to gain the capital just to
stand still. The cost of ships is
outstripping growth in profitability
For the next few years, we have the
benefit of having contracted for ships
earlier. But that benefit will run out
and we will pay much higher prices
for the same vessels going forward.
Our customers will recognize this,
albeit grudgingly. Our customers
require state-of-the-art vessels that
do not simply transport their
chemicals from port A to port B, but
also exceed governmental health,
safety, and environmental criteria as
well as their own Responsible Care
standards. In addition, they require a
degree of flexibility, service and last
minute cooperation to adjust to
parcel loadings and scheduling that
makes our business a truly individualized
service. Importantly, their
products are mostly high value, at
least in relation to transoceanic shipping
costs, and the chemical industry
is currently doing very well, which in
fact is why there is reasonable
demand for our services. For us to
continue to deliver the transoceanic
shipping services to our customers on
the standards that they and international
bodies demand, we must
continue to make the large capital
investments in newbuildings.
Whilst newbuilding costs are up (and
significantly so) and the need for new
vessels increases, there nevertheless
will be ups and downs in parcel
tanker freights along the way, in
consequence of changing supply and
demand. Estimating the world
economy/the demand side of the
equation is difficult particularly with
the current lead times for ordering
new vessels. Forecasting demand is
complicated by the difficulties of
predicting the important ton/mile
equation and the ballast ratio.
In other words, will the world’s
chemical trading patterns permit us
to efficiently use our vessels with a
minimum of ballast legs – otherwise
our investment in capacity will be
underutilized, and we know what
that means.
Bill Clinton captured it best – “it’s the
economy, stupid”. Either you recognize
changing market forces and
respond or you get run over by them.
We need to ensure that our financial
performance allows us to respond.
So there you have it, scratch your
head and have a nice day.
Dan Odfjell
Chairman of the Board Odfjell ASA
4 ODFJELL Quarterly March 2005