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CEO's Column - NORDEN News Magazine Summer 2011

Doing the right thing

If in the future someone decides to write the history of the dry cargo market, I am sure that 2011 will have a dedicated chapter.

Not only because we are in the middle of a historical supply growth with a massive addition to the global fleet, but also because the year has presented us with numerous disruptions in demand: flooding of Australian coal mines, inundations along the Mississippi river, natural disaster in Japan, political unrest and revolution in North Africa and the Middle East, soaring oil prices, debt crisis in Southern Europe reaching far into the Euro zone, weakened global growth, etc. Much of what could go wrong indeed has gone wrong.

Seen in this light, it goes without saying that freight rates are under pressure. There have been significant decreases in rates for the largest vessel type, Capesize, while rates in the small and medium vessel types have trended more sideways, however decreasing somewhat.

Luckily, not everything is negative. There are bright spots, the brightest being scrapping. Driven by the low rates and reasonable scrapping prices, a number of old, outdated vessels are sent for scrapping. We have seen this pattern for 5 consecutive months, and consequently scrapping will be record high this year. Some analysts expect 22-23 million dwt. to be scrapped. This means that the net fleet growth will be slightly lower than feared.

Another bright spot is that few new vessels are being contracted. Order activity this year appears to be the weakest since 2002. This of course will also contribute to faster restoring the balance between supply and demand in the market.

Finally, we must not forget that despite the massive disruptions in demand, we are seeing reasonable growth in demand for most commodities, especially iron ore and cement. And many years in the shipping industry have taught me not to underestimate the market even in the darkest of times. We know, for instance, that China following the worst drought in 50 years is lacking the power usually provided by water power. We know that India’s own production of coal also this year is insufficient to meet the demand of the country. We know that Japan is in need of large amounts of commodities for rebuilding. We know that the grain harvest in South America looks promising. And we also know that the mines in Australia are soon back on full speed.

But we do not know whether these events will affect the market and if so, how much. Whether they can contribute to creating the cargoes which especially the Pacific is short of. We can hope for the best, but in NORDEN we are still planning from the perspective that also the rest of 2011 will be very challenging.

How do we cope with the difficult market? We do our work, simply put. We began the year with approximately 30,000 ship days covered by charter outs and contracts of 22 million tonnes of cargo. These vessels will sail and these cargoes will be transported – that is the backbone of our business. But there have also been windows in the market allowing us to do classic operations activity – take in vessels, employ them in a reasonable manner for a short period of time, maybe only for a single voyage, and then phase them out again. Finally, we focus on growing the contract portfolio. The goal is to increase the transported volumes under the cargo programme for the years 2011-13 by 15% annually on average, and we want to increase cargo volumes secured by contract accordingly. Without revealing too much, I can say that the first 6 months have confirmed that these goals are achievable also with reasonable profitability.

I will not claim that it will be easy. Supply growth and the imbalance in the market this year are putting everyone under pressure. But in NORDEN we can afford to do “the right thing” at any time and think long term. Far from all our competitors are in a similar position. We also have the will, a talented organisation, well-functioning systems, a clear strategy and a modern fleet. This means that we have what it takes to succeed, maintain focus on our customers and act in any way required by the situation to strengthen the business going forward.

Let me finish with a PS regarding Japan: together with other contributors, I have recently visited the areas hit the hardest by the natural disaster. Even though the clean-up is proceeding with Japanese meticulousness, it is not difficult to sense the scope of the disaster. However, the image that I am taking with me home is not one of devastation and distress. It is the image of the lively, smiling and cheerful little children who we met during our visit. Children who are coping despite having lost their homes, parents, family members and familiar surroundings. This much zest for life following traumas that big. That certainly puts things in a new perspective.

I wish you a wonderful summer!

CARSTEN MORTENSEN

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