Based on NORDEN’s vision, the strategy plan Long-term Growth in Challenging Times defines a number of growth and earnings targets for the years 2011-13 and launches initiatives which will also enhance our strategic prospects beyond this period. The strategy plan positions NORDENs for long-term growth under various market conditions and also focuses on a financially strong shipping company’s options in cyclical markets.
The strategy is designed to secure balanced growth based on 1-and 3-year operational and financial targets through which the Company will be strengthened compared to its competitors. At the end of the strategy period, NORDEN’s goals are:
- to be one of the globally preferred partners in the market for cargo contracts in Dry Cargo
- to have doubled the owned fleet of product tankers at low cost in historical terms
- to have created added value to the shareholders through active operator business and sharp focus on costs
The overall goal of the strategy plan is for NORDEN to ensure its shareholders a higher return over the 3 years than its peers through dividends, share buy-backs and share price increases. In 2012, the total shareholder return was 25.2% (based on share price development and dividend), this was significantly above the average return of a negative 1.4% generated by 7 peer companies.
In anticipation of difficult market conditions, NORDEN had decided on ensuring tight cost control both on shore and at sea. Both were realised in 2012. In spite of growth in the number of ship days of 7%, administrative expenses on shore were reduced compared with 2011. On board the vessels, focus has also been on costs, and ongoing budget follow-ups as well as streamlining of purchases have resulted in savings. In 2013, NORDEN will continue tight cost control both on shore and at sea.
NORDEN continuously works on maintaining financial resources allowing the Company to stand up to hard times, act independently and take advantage of the opportunities in a cyclical market even in times when external bank financing is difficult to obtain.
In the short term, the Company’s large holding of cash and securities may reduce the shareholders’ return, but it provides the best opportunities of generating an attractive risk-adjusted return in the long term. At the end of 2012, the Company had cash and securities of USD 529 million and undrawn credit facilities of USD 161 million. With these financial resources, NORDEN can carry through both already known investments as well as the planned new investment programme for 2013 without additional external financing.
The ambition in Dry Cargo is to ensure profitable growth in cargo volumes. The target is 15% in both annual growth in realised volumes and annual growth in contractually secured cargo volumes.
In 2012, NORDEN’s transported cargo volumes in Dry Cargo increased by 6%, and following massive growth in 2011, realised growth in cargo volumes for the 2 years collectively thus amounts to 22% p.a. The target for the contractually secured cargo volumes was, however, not reached as annual growth in these volumes was 6% for the first 2 years. The decreasing freight rate development has resulted in significant price pressure also on multi-year cargo contracts, and therefore, the Company has weighted the target of volume growth against counterparty risk and profitability and has decided to give profitability priority. In this connection, the Company has deselected some contracts. Development of customer relations and multi-year cargo contracts remains an important focus area in Dry Cargo, but it has to be with reasonable profitability.
As part of the dry cargo business, focus is on added value creation from operator activities, e.g. by optimisation of logistics and fuel consumption in the cargo contracts. In 2012, Dry Cargo created added value of USD 22 million, which is in line with 2011. The added value is calculated as the difference between actual earnings and earnings which NORDEN would have generated if open days had been employed at the forward rates prevailing at the beginning of the year.
The Dry Cargo gross core fleet consisting of owned and long-term chartered vessels with purchase option – active or for future delivery – is basically unchanged with an increase from 80 to 81 vessels in the past 2 years in accordance with the Company’s wait-and-see attitude towards the dry cargo market. In the course of 2013, NORDEN wishes to increase exposure again to an expected improving market. This is to take place primarily by investing in dry cargo vessels with focus on fuel efficient newbuildings or subsidiarily good secondhand vessels at attractive prices.
Since 2001, apart from 1 year, the commercial activities in the Tanker Department's 2 primary vessel types, MR and Handysize, have generated better earnings than the 1-year T/C rates. For 2001-2011,
NORDEN’s earnings within the MR vessel type have thus been 11% above the 1-year T/C rates on average. In 2012,Norient Product Pool, NPP, became the world’s second largest product tanker pool in MR and Handysize, and NORDEN’s earnings were 3% and 8%, respectively, above the 1-year T/C rates. Compared to the more volatile spot market, NORDEN’s earnings were even better.
Since 2009, the Company has increased its fleet of owned product tankers from 11 to 22. In the strategy period, focus has primarily been on investments in fuel efficient tonnage, and the Company has 4 MR vessels for delivery in 2013 and 2 Handysize vessels in 2014. Towards the end of 2012, the Company agreed to sell 3 product tankers and expects to reinvest in 3-4 newbuildings within the same vessel type but with better fuel efficiency in the course of 2013.
NORDEN is thus close to reaching the target of owning at least 25 product tankers.
The Company’s target of fleet growth is accompanied by ongoing efforts to ensure quality in the form of safety and the working environment being among the best in the business. Though results from Port State Controls and vettings in 2012 have developed somewhat negatively, they are still at satisfactory levels in relation to the Company’s overall goal to be among the best.
The Company’s strategic focus is based on assumptions about future macro and market conditions. It is NORDEN’s view that the worst pressure from high fleet growth has passed within both segments, but the dry cargo market still depends on large scrapping volumes for yet a period in order to ensure manageable net fleet growth. With continued positive development in demand, a gradual improvement of the freight markets can therefore be expected.
In the coming years, the most significant uncertainty factors other than the general macroeconomic development are expected to be global yard capacity, access to capital as well as global commodity supply. Global yard capacity and access to capital will be crucial to the addition of tonnage in both of the Company's segments. There is still plenty of yard capacity for interested buyers, but it is assessed that the shortage of financing will limit the number of newbuilding orders, which will substantiate the expectation of an improved market.
In both segments, continued positive development in demand is expected, driven by growth in global commodity supply where especially growth in iron ore and oil production will be decisive. In 2012, several of the world’s 5 largest iron ore producers reduced their expansion plans, but even these reduced plans indicate relatively high capacity growth of 8-10% per year for the next 2-3 years (source: information from mining companies' websites),and continued high ore prices will support this development.
In the coming years, growth in transported oil products is expected to continue developing at a reasonable level due to the startup of new, large refineries in the Middle East, Asia and – as something new – the USA (Port Arthur) as well as increasing import demand in emerging countries. Unlike recent years, growth in the OECD countries is not expected to have significant short-term influence on the product tanker market, which is increasingly driven by the economic growth in Africa, Latin America and Asia.
2013 is expected to be yet another difficult year market-wise in Dry Cargo. NORDEN starts the year with high coverage and will take advantage of its financial capacity to primarily order fuel efficient newbuildings and long-term charters with purchase option at attractive price levels.
There will still be focus on strengthening customer relations and increasing cargo volumes to the extent that this can be done at profitable levels.
After a number of years with significant investments in the owned Tanker fleet, the Company will chiefly focus on optimising the fleet without expanding it further in 2013. The optimisation will be realised through fuel efficiency and continuous modernisation of the fleet. As part of this, the 3 sold vessels will be replaced by 3-4 fuel efficient newbuildings. Improvement of the freight market has taken a bit longer than expected, and the Company will focus on delivering a return on the vessel acquisitions of recent years before making further investments.
More details on NORDEN’s strategy in the pdf Annual Report 2012 pages 5 to 7