NORDEN works actively at avoiding or limiting the risks there are besides the commercial aspects in operator activities and shipping operations.
Active risk management plays a central role in NORDEN’s goal for the Company to make reasonable earnings and maintain its financial flexibility also in fluctuating markets. An important element is NORDEN’s diversification of its business by being active in 2 segments: Dry Cargo and Tankers.
It is NORDEN’s policy to only assume material risks within the commercial aspects of its shipping operations. Other risk factors should be avoided or limited by hedging the exposure, through diversification or guarantees. The Executive Management is responsible for identifying material risks and developing the Company’s risk management. Exposures and the utilisation of the framework are reported to the Board of Directors on a monthly basis.
Below follows a review of the material commercial risks. For a review of the financial risks, please see Financial Risk Management as well as the section "Financial position" on page 13 in Consolidated Annual Report 2016.
Purchasing and chartering vessels imply a risk as the Company assumes financial liability in expectation of generating earnings which are dependent on the freight market. To control the uncertainty relating to earnings, future open ship days are covered by cargo contracts, T/C contracts and Forward Freight Agreements (FFAs) to the extent to which Management finds it attractive.
At the end of 2016, coverage for 2017 constituted 84% (51%) and 21% (16%) for Dry Cargo and Tankers, respectively, corresponding to a total value of USD 280 million (USD 216 million) (see also the market sections for Dry Cargo and Tankers).
Changes in ship values have a significant impact on the value of the Company, both directly on the value of the owned fleet and indirectly through the value of purchase options.
NORDEN is continuously focusing on how to optimise the portfolio of owned vessels; be it in relation to ongoing replacement of older vessels with newer vessels or newbuildings, or fuel efficiency improvement of the current fleet.
The operation of vessels is exposed to a number of risks. The safety of the crew is ensured by means of updated procedures, heightened focus and repeated drills. The Company follows Best Management Practices (BMP) with regard to the threat of piracy, and during 2016, no pirate attacks or attempted attacks were seen against NORDEN vessels.
In terms of value, the most material events are oil spills and total loss (lost value of owned vessels, purchase options and charter parties). The Company covers these risks by taking out insurances with recognised international insurance companies.
In addition, risks are minimised by operating a modern fleet and by investing in the maintenance of the vessels and in staff awareness of both external and internal environments. In general, an increased operational risk is seen in the market due to recent years’ poor market conditions, which e.g. cause some shipowners to economise on maintenance. Therefore, NORDEN has increased focus on the condition of the vessels in connection with short-term charters.
NORDEN reduces its credit risks through systematic credit assessment of counterparties and regular monitoring of their creditworthiness. For this purpose, own analyses are applied based on external credit rating agencies and publicly available information. Each analysis results in an internal rating, which is subsequently used in NORDEN’s determination of the allowed scope of the commitment.
In connection with newbuilding contracting, it is assessed whether the credit risk in relation to prepayments to the yard should be reduced through repayment guarantees issued by banks with good credit ratings.
The Company’s largest variable cost is fuel in the form of bunkers, and the total costs of the Company will therefore depend on the market price for bunkers. The Company uses bunker swaps to hedge future consumption of bunkers when entering into COAs in case there is no bunker adjustment clause in the agreement.
In connection with charter agreements, the Company has a bunker price risk in relation to the quantity of bunkers with which the vessel must be redelivered. Due to the uncertainty of the size of this quantity, this exposure is not hedged.
In a global company like NORDEN, it is crucial that the Company’s IT systems are always available. The IT Department has established a technical emergency capacity with an IT environment distributed on 2 locations with mirrored critical systems. In addition, the Company has established an IT Disaster Recovery Plan involving the entire organisation and supporting the IT Department in setting up emergency operations as soon as possible after a disaster.