The risks that Concordia Maritime is exposed to can be divided into three main categories – operational risks, financial risks and external risks. The financial risks, mainly related to currencies and interest rates, are described in note 20 on page 67 in the Annual report, and are therefore not reported in this section
The purpose of describing Concordia Maritime’s risk situation below is partly to give investors and others a picture of the risk environment in which Concordia Maritime operates, and partly to demonstrate what Concordia Maritime is doing to minimize the negative effects of these risks. The description, however, does not make any claim to being complete or comprehensive.
Operational risks
Operational risks refer primarily to risks related to the management of the business, in other words, risks that the board and management are able to infl uence to a degree.
Ship management and insurance issues
As regards the risks related to the actual operating of vessels, Concordia Maritime has taken out insurance policies customary in the industry. The vessels are insured against damage and loss (Hull & Machinery) at amounts representing the vessels’ market value. Protection & Indemnity applies without limitation of amount, except for responsibility for oil spills, where the limitation of amount is USD 1 billion. The vessels are also insured against Loss of Hire.
In addition to the insurance policies
above, Concordia Maritime has also taken out the customary insurance for operating in specific waters. One example is COFR insurance (Certifi cate of Financial Responsibility), which is required in order to operate vessels in American waters. COFR is issued by the US Coast Guard to an operator (owner/bareboat charterer) who can demonstrate having the fi nancial capability, via insurance, to pay for cleaning up oil spills and oil damage up to the amounts required by the American Oil Pollution Act, OPA 90.
Customers
Customer-related risks refer to the risk that a customer may choose to terminate the relationship, or the risk that a customer cannot meet his obligations towards Concordia Maritime.
As regards the first aspect, Concordia Maritime’s strategy is based on close and long-term relationships with customers. At the end of 2007, 11 of the 14 vessels in the fleet were signed to charters for periods ranging from 2 to 9 years. The remaining 3 vessels will be delivered in 2009–2010, see graph on page 5 in the Annual report.
Normally, basing one’s business on a limited number of customers incurs greater risk. In Concordia Maritime’s case, however, the long-term contracts with what are mainly world-class energy companies provide operational and fi nancial stability during the periods covered by the contracts.
Environment
An accident at sea or in port (breakdown, oil spill, collision, etc.) could lead to extensive negative consequences both to the environment and to property. The new vessels, built in accordance with the P-MAX principle, are probably among the world’s safest product tankers. The vessels have been specially designed for operation in sensitive waters. The fact that accidents happen can never be excluded. However, Concordia Maritime devotes considerable resources to the continuous development of both vessels and basic systems and procedures, both to prevent accidents and to minimise damage should an accident happen.
Brand
Despite insurance cover, an accident could have a very serious impact on Concordia
Maritime. The oil industry’s demands for safety and environmental responsibility are comprehensive, and an accident at sea or in port would have not only negative environmental consequences, but could also damage the Concordia Maritime brand. Ever since its establishment in 1984, the company has promoted its image as a quality shipowner, with high demands in all aspects of safety. This position makes particularly high demands on control and responsibility. Guarding against this type of risk is diffi cult, and can only be achieved by extensive preventive work and complete openness should an accident nevertheless occur.
Employees
Concordia Maritime is very dependent on being able to attract and retain employees. This applies in the case of e.g. technicians and employees responsible for customers
and partners, but above all skilled seagoing personnel. Concordia Maritime has only a small organisation of its own, and this normally means it is very dependent on a
number of key individuals. This is to some extent counterbalanced by the close cooperation with several companies in the Stena Sphere. Concordia Maritime also puts considerable effort into creating a stimulating workplace, with good opportunities
to develop.
External risks
External risks refer mainly to the risks related to changes in the outside world and the market, in other words, risks that the board and management only have a limited chance of infl uencing in the short term, but must nevertheless deal with in the longterm planning of the business.
Economic trends
Shipping is a highly cyclical business. The demand for transportation of petroleum and chemical products is largely determined by the consumption of these products. This, in turn, is largely determined by the state of the economy. The effects of an economic recession are, in the short term, largest in the spot market, but in the long term they also have an effect on the time-charter market. It is diffi cult to guard against a long-term economic recession. Concordia Maritime strives to limit the risks by means of a strategy based largely on long-term contracts.
Political risks
Concordia Maritime operates in a market that is subject to a number of regulations that may change from time to time depending on changing factors in the outside world and/or political decisions. This includes decisions to do with regulations for international trade, safety and the environment.
As regards international trade, the trend in recent years has been towards increased global free trade, and fewer restrictions of a commercial policy nature. There has even been harmonisation in the area of taxation, which to some extent has reduced the risks that fiscal policy changes might affect the competitive situation. The main risk of changes would appear to lie in the area of safety and the environment, where there is a continual review of international and national laws, industry-related conventions,
regulations and practice.
This trend is being driven from several directions, both political and from trade associations and industry. But having one of the world’s safest and most modern fl eets means that for Concordia Maritime, the increased focus on safety and environmental issues is, if anything, an opportunity.
Freight rates
Freight rates in tanker shipping can fluctuate signifi cantly from time to time. A downturn in freight rates may be due to reduced demand for transport capacity, or an increased supply of vessels. A change in rates can have a signifi cant impact on the profitability of the business. Freight rates on the spot market normally fl uctuate more than the rates on the time-charter market. With a large part of the fl eet signed to long-term charters, Concordia Maritime’s exposure to changes in freight rates in the next few years is limited.
Oil price
Changes in oil prices do not affect Concordia Maritime to any great extent. Its business
is largely based on time charter contracts, which means that the customers are
responsible for the costs of the voyage (bunker oil, port dues, pilots, tugs, etc.). Changes in the price of oil affect freight rates, which, in turn, have an impact on the shipping company’s revenue.
War/instability
A large part of global oil production is in areas of political instability. War or other disturbances may limit access to oil and petroleum products, but also increase the need for transport to and from various storage depots. The risks of this affecting the business are relatively limited in the short term, since Concordia Maritime’s business is largely based on long-term contracts.