Like all commercial enterprises, our activities are associated with certain risks. We have chosen to divide them into four main categories – corporate risks, market-related risks, operational risks and financial risks.
Information about these risks and Concordia Maritime's risk management is provided below and in the section Risk and sensitivity analysis in the Annual Report.
A description of internal control designed to manage risks relating to financial reporting are contained in the Corporate Governance Report.
Corporate risks refer mainly to overall risks related to the actual management and operation of the Company.
The oil industry’s demands for safety and environmental responsibility are comprehensive and an accident at sea or in port would not only have negative environmental consequences, but would also seriously damage the Company’s name. We have been a quality shipping company for many years, with high standards in all aspects of safety. This position places particularly high demands on control and responsibility. It is difficult to protect against this type of risk. It can only be done through extensive preventive work and complete transparency should an accident occur despite the measures taken.
We are very dependent on being able to attract and retain employees. Our shorebased organisation is small and this normally means that there is a high dependency on a number of key individuals. However, this is counterbalanced to some extent by the close cooperation with several companies in the Stena Sphere. Nevertheless, we work actively to create a stimulating workplace that provides good development opportunities for employees.
A prerequisite for the existence of our business in the short and long term is, of course, access to capital and funding. In times of financial turmoil and instability, it is particularly important for us to have the vessels on order fully financed. One of our overall objectives is to maintain a sound financial position which enables us to make longterm investments.
Financing risk is the risk that the Company will be unable to satisfy its need for loan capital. This risk increases in the event of financial turmoil in the world market. Stable cash flows, good disposable liquidity and sound relationships with banks and other potential lenders are factors that can limit the risk.
Market-related risks are primarily risks associated with changes in the outside world and market. The board and management only have a limited opportunity to control these risks in the short term, but must still deal with them in the longerterm planning of the business.
Shipping is a highly cyclical business. Demand for transportation of oil and refined petroleum products is largely determined by the consumption of these products. This, in turn, is largely determined by the economic situation. In the short term, the effects of economic fluctuations are greatest in the spot market, although they also affect the time-charter market in the long term.
Freight rates in tanker shipping may fluctuate sharply from time to time. A decline in freight rates may be due to reduced demand for transport capacity or an increased supply of vessels. A change in rates has a major impact on the profitability of the business. Freight rates on the spot market fluctuate significantly more than the rates on the time-charter market. At year end, approx. 30 percent of our fleet was chartered out on fixed contracts for 2014; the rest were employed on the spot market.
Freight rates for seaborne oil transport are calculated based on the established Worldscale freight rate system. Even though the mechanisms that control this system are supposed to reflect the fluctuations in oil prices, there is still a certain lag. Rapidly rising or falling oil prices could therefore have a major impact on earnings in the open market. The stocks of different countries or oil companies also have a bearing.
The Company operates in a market affected by numerous regulations which may change due to changing external factors and/or political decisions. These include decisions on regulations for international trade, safety and the environment.
The trend for international trade in recent years has been towards increased global free trade and fewer trade-policy-related restrictions. The main risk of changes would appear to lie in the area of safety and environment, where international and national laws, industry-related conventions, regulations and practice are continuously reviewed.
This trend is being driven from several directions – political bodies, trade associations and industry. As we have a very safe and modern fleet, the increased focus on safety and environmental issues actually represents an opportunity for us.
A large part of global oil production takes place in politically unstable regions. War or other disturbances may limit access to oil and petroleum products, but also increase the need for transport. This risk affects both the industry as a whole and also us.
Operational risks are risks related to the management of the operational side of the business.
We have taken out insurance policies customary in the industry in order to cover risks associated with the actual operation of the vessels. The vessels are insured against damage and loss at amounts representing the vessels’ value. Protection & Indemnity applies with no limitation of amount, apart from responsibility for oil spills, where the amount is limited to USD 1 billion. The vessels are also insured against loss of hire due to damage or shipwreck. In addition to the policies above, there is also the customary insurance for operating in specific waters.
An accident at sea or in port (shipwreck, oil spill, collision etc.) could have far-reaching negative consequences for both the environment and property, and, at worst, could result in loss of life. When it comes to safety, we are far ahead. Our P-MAX tankers are built with double systems for propulsion and manoeuvring. They have two separate engine rooms separated by fireproof and watertight bulkheads, and separate fuel and control systems. However, the possibility of accidents occurring can never be discounted. We devote considerable resources to the continuous development of training and procedures.
There is intense competition for competent seagoing personnel. In order to recruit the best crews, a good reputation in the market is required. We strive to be an attractive employer that looks after its employees. Salaries and other forms of financial incentives are important parts of this work, and it is also crucial to provide a positive work environment and the opportunity for longterm employment
Credit risks represent one of the financial risks to which we are exposed. These are mainly counterparty risks – customers, shipyards and other subcontractors and cooperation partners. Other financial risks are described in note 18 in the Annual Report.
Counterparty risks – customers
Counterparty risks relating to customers are primarily the risk of a customer being unable to discharge its obligations. The risk is higher when business activities are based on a limited number of customers.
Counterparty risks – subcontractors
and partners With counterparty risks related to subcontractors and partners, there is a substantial risk that contracted shipyards will fail to discharge their obligations – either due to financial problems or because they are unable to deliver on time. We protect ourselves in different ways against these and other counterparty risks. We maintain a long-term perspective in our collaborations, and conduct ongoing evaluations and monitor the financial position of counterparties.
Financial risks, which are mainly related to currency and interest rates, are described in note 18 in the Annual Report and have therefore not been described in this section.