Directors’ Report 2014
THE DRY BULK MARKET
In 2014 Chinese iron ore imports amounted to 932 million tons, or approximately 14% higher compared to the year before. The ton-mile growth was not as high since a significant part of Chinese iron ore import was sourced from Australia, rather than Brazil.
However, Chinese steam coal imports dropped sharply in 2014 to an annualized pace of just 135 million tons, the lowest level in more than three years. Most of this decline has come from Indonesian supplies, hitting the Panamax segment in particular. The Chinese government in 2014 introduced a ban on dirty coal as part of China’s environmentally friendly agenda. Coal will still be important for China, where new technologies for cleaner burning is required to generate sufficient power, due to difficulties related to replacing coal as a power source.
The predicted Q4 rally started towards end of October but culminated only two weeks later. Capesize-index peaked at USD 27,000/day, whereas Panamax- and Supramax-indices went up to around USD 9,300-9,900/day.
The Capesize-index ended the fourth quarter at USD 4,910 per day, whereas the Panamax-index ended at USD 6,953 per day. The Supramax-index ended the quarter at USD 9,383 per day. As per today the Cape index stands at USD 3,793 per day, Panamax-index at USD 4,837 per day and Supramax-index at USD 6,511 per day. These indices are close to all-time low levels. According to Baltic Exchange S&P Assessments the valuation of a 5-year old Supramax is USD 17.0 million, down from USD 26.3 million one year ago.
M/S Belstar, M/S Belnor and M/S Belocean continued in 2014 on their long-term charter parties to Canpotex Shipping Services Ltd. The company’s tonnage is modern, and all ships operated satisfactorily without significant off-hire except for the planned drydocking of M/S Belstar. The operating expenses were close to budgeted levels.
Belships entered in 2013 into a newbuilding program for eco-design Ultramax bulk carriers from Imabari Shipbuilding Group in Japan. Delivery is scheduled for 3 x 61,000 dwt ships from Q3 2015 to Q1 2017, where two ships will be owned by the Group and one ship will be time chartered from a sister company of the shipbuilder.
The subsidiary Belships Management (Singapore) Pte Ltd made a positive contribution from technical management services. The company expanded its customer base, and currently provides technical management for 20 ships, including Belships’ own ships.
The Group had an operating income of USD 22 079 000 in 2014 (USD 25 973 000), giving a consolidated operating result of USD 1 086 000 (USD 2 383 000). The decrease in operating income is mainly related to M/T Belaia, which was redelivered in the beginning of March 2014. Operating result decreased by USD 1.3 million and is mainly explained by impairment of ships and expensing of share-option to CEO. The pre-tax result was USD -1 578 000 (USD 12 000), while net result for the Group was USD -1 601 000 (USD -154 000). The Group’s EBITDA was USD 8 560 000 (USD 9 334 000).
The parent company’s net result for the year was NOK -10 447 000 (NOK -9 043 000). The Board proposes the result for the year to be allocated as follows:
|Amounts in NOK|
|TOTAL ALLOCATIONS||-10 447 000|
|PROVISION FOR DIVIDEND||0|
|TRANSFER FROM OTHER RETAINED EARNINGS||-10 447 000|
The annual accounts are presented on a going concern basis in accordance with § 3 – 3 of the Norwegian Accounting Act, and the Board considers that they give a true and accurate portrayal of the company’s business. The Board considers that the conditions for a going concern are in place.
The consolidated accounts have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU. The information in the accounts gives a true and accurate portrayal of the company’s and the Group’s assets, liabilities, financial position and results as a whole. The annual accounts give a fair view of the development, profit and overall financial position of Belships ASA and the Group, and describe the most significant risks and uncertainties facing the Group and the parent company.
SAFETY AND THE ENVIRONMENT
Belships aims to minimize environmental impact from its activity, and strives constantly to improve safety. Measures are taken to prevent the business polluting the environment. Belships works consciously to improve standards, on board and ashore. Pollution from ships is governed by a number of national and international environmental standards and certifications. Belships meets official requirements in terms of safety and the environment.
The newbuildings from Imabari Shipbuilding will have low emissions of pollutants and will have ballast water treatment systems.
Belships is headquartered in Oslo, from where most of its commercial and financial business including insurance is handled. Technical management is handled from Singapore.
There has been no change within the senior management in 2014.
Management activities in Singapore were stable over the year. The Group employed 62 office staff at the end of 2014. Ships under management had 498 crew members on board. The sick leave was less than 2% in 2014. The Group was not subject to any serious accidents in 2014.
Belships aims to treat women and men equally. No discrimination on the grounds of gender is tolerated. Of the company’s office staff, 32 are women. The working environment at the various companies within the Group is considered to be good.
FINANCIAL AND OTHER MATTERS
The Group has conducted impairment tests in line with IAS 36, valuing the M/S Belstar, M/S Belnor and M/S Belocean based on observable market values of equivalent ships and contracts today, and including the discounted added value of the charter parties entered into. These internal valuations indicated that there was a need for impairment of the company’s ship investments with a total of USD 3.2 million in 2014. In the financial statement for 2014 the book value of M/S Belstar, M/S Belnor and M/S Belocean were impared with USD 1.8 million, USD 0.8 million and USD 0.6 million, respectively.
Consolidated liquidity was USD 8.1 million as at 31 December 2014, against USD 14.3 million at the beginning of the year. Total mortgage debt had a balance of USD 46.3 million at year-end and was reduced by USD 1.6 million during 2014. The contract price for the two newbuildings amounts to USD 56.5 million. Instalments of USD 5.6 million and USD 8.5 million were paid in 2013 and 2014 respectively and the remaining newbuilding instalments were at year end USD 42.4 million. The payments have been financed by the company’s surplus liquidity.
Belships has during 1st quarter 2015 accepted a post-delivery financing offer for the two Imabari 61,000 dwt newbuildings for delivery in September 2015 and March 2016. The loan facility covers the lower of 70% of contract price or market value at the time of drawdown, with a maturity of 7 years. This will secure long-term financing of the newbuildings.
The Group’s solvency and financial position is satisfactory, however the Board works to further improve the liquidity position. By end of 2014 the book equity of the Belships share was NOK 10.33, while the book equity ratio was 56.8 %. After delivery of the newbuildings assuming 70% loan financing, the book equity ratio will be reduced to 41%.
Current activity is expected to generate sufficient liquidity to cover current debt throughout 2015. Belships aims to provide its shareholders with a competitive dividend yield, but during the current investment program the dividend will be suspended.
At the end of 2014 Belships held 548,000 treasury shares in total at an average cost of NOK 9.91 per share. In 2014 the employees have been granted options to purchase 200,000 shares at a price of NOK 6.47.
These options can be exercised from 8 May 2014 until the annual general meeting in 2015. The Belships’ share value has decreased by 40.5 per cent in the course of 2014. By comparison, the OBX increased by 4%. A total of 2,448,000 shares were traded in 146 of the 250 trading days. 4,891,000 shares were traded in 2013 in 182 of the 251 trading days.
The Group is exposed to financial market risks due to changes in FX rates, interest rates, freight rates and oil prices. Such changes may affect the Group’s assets and liabilities and its future cash flows. Belships is working continuously to manage these risks. To reduce financial market risks, Belships use derivatives when appropriate.
The Group’s income and costs are mainly in USD. Belships’ foreign exchange exposure is linked to administrative costs in Norway and in Singapore. Compared to the Group’s cash flows, however, this exposure is limited. Belships’ strategy is to manage the exposure in relation to cash flow fluctuations due to changes in interest rates. Belships has entered into a 5-year SWAP agreement that started in August 2013, covering about 24% of the present interest risk exposure related to the interest-bearing debt.
Fluctuating bunker prices will not affect the Group as the ships are fixed on long-term time charters where the charterers cover the fuel cost.
Belships aims to minimize counterpart risk by entering into long term time charter contracts with the most reputable charterers.
The Group’s limited tax cost is expected to continue, since the ships are owned by a Singaporean subsidiary within the tonnage tax regime. Similarly, the group’s Norwegian entities have considerable tax loss carried forward.
Belships’ corporate governance is based on the company’s goals and strategy. The Company is listed on the Oslo Stock Exchange, and is subject to the Norwegian Accounting Act, the Securities Trading Act and the Public Limited Company Act.
With exception of establishing election committee, Belships follows the Norwegian code of good corporate governance of 30 October 2014. Please see the separate statement of corporate governance that appears as a section of the annual report in its own right.
Belships is a shipping company with global reach and close to a hundred years history. The Board is well aware of the direct and indirect impact Belships’ activities have on the outside world as well as the company’s shareholders. Belships is determined to create long-term shareholder values and at the same time act as a responsible participant in the society.
The most important issues for our business and our shareholders in respect of Corporate Social Responsibility (CSR) are considered to be:
– Human and labour rights
It is our policy to follow the standards, laws and regulations set by the national and international maritime regulatory authorities, but also the moral and ethical behavior as set by our culture. Belships reports on safety and environment in the annual report.
Belships does not tolerate any corrupt practices with our suppliers, customers or government entities affecting our business. Belships do pay attention to the working conditions and safety within our own operations. Please see the separate statement of corporate social responsibility that appears as a section of the annual report in its own right.
With depressed freight rates, there is a downward pressure on asset prices in all dry bulk sectors. Buyers turn their attention to Japanese tonnage, adding pressure on asset prices for Chinese built tonnage. Another factor is the recent strengthening of USD against JPY, leading to more sales candidates from Japanese owners.
Freight rates for all sizes have dropped to levels hardly covering operating costs, something most market participants did not anticipate. RS Platou Economic Research believes this weak start of the year is most likely influenced by inventory adjustments and other seasonal factors. Last year’s substantial increase in iron ore imports, combined with increased domestic production, raised Chinese iron ore inventories to an all-time high at year-end.
Low steel demand during winter in China has continued to erode iron ore and steel prices with spot iron ore for delivery to China closing this week at around USD 60/ton. Demand and prices for iron ore and steel will remain low until activity picks up after Chinese New Year towards the end of February or early March.
With increased capacity of iron ore from Australia and Brazil, the international iron ore prices have dropped more than 50% over the last 12 months. China will be encouraged to continue the import rather than exploit their domestic resources with low FE content.
Lately there has been an increased activity in conversions of capesize newbuilding contracts to tankers, and scrapping of older tonnage has also picked up considerably with 5 million dwt dry bulk tonnage being recycled in two months (January-February). Both these factors, including slippage and cancellations, will contribute positively towards a better market balance. Most importantly, new ordering of bulk carriers has more or less come to a complete halt.
International oil prices and bunker prices are moving in tandem. Higher bunker prices will improve the competitiveness of eco design newbuildings.
Belships’ ships are sailing on long-term charter parties to a reputable counterpart, and short-term market fluctuations will not affect the company’s earnings and cash flow. Existing charter parties represent future nominal revenues of USD 97 million.
Future focus will be to further develop Belships as a long term tonnage provider of modern bulk carriers to reputable charterers. Belships aim to build up a portfolio of ships and charters that will provide a steady return while minimizing the residual risk exposure through a duration spread.
Oslo, 19 March 2015
Sverre J. Tidemand
Carl Erik Steen
Bernt Ulrich Müller