Note 2 - Risk management

Active risk management is a cornerstone of NORDEN’s strategy to ensure stable, high earnings. The shipping industry is highly sensitive to market fluctuations, which can be seen from the at times severe fluctuations in freight rates and tonnage prices.

The overall risk management objective is to reduce the sensitivity of the Company’s earnings to cyclical fluctuations. The overall guidelines for financial and commercial risk management are set out annually by the Board of Directors.

The framework for the risk management is conservative and is handled by the Company’s Finance Department in collaboration with the commercial departments, which report to the Board of Directors and the Board of Management monthly.

Chartering vessels implies a risk as the Company assumes a liability to pay T/C hire for an agreed period of time. The risk is less than that associated with the purchase of a vessel, however, as the Company charters vessels for a limited period of their economic lives only.

NORDEN’s risk management policy is unchanged from last year.

The disclosure requirements as to financial risks are regulated under IFRS. Moreover, NORDEN provides descriptions of commercial and other risks below, despite the fact that such disclosures are not required under IFRS.

The following risks are relevant to the Company:

Commercial risks:

The risk of fluctuations in the prices of vessels.
The risk of fluctuations in freight rates.

Financial risks (IFRS 7):

Foreign exchange risk – The risk that the fair value of or future cash flows from financial instruments will fluctuate as a result of changes in exchange rates.
Interest rate risk – The risk that the fair value of or future cash flows from financial instruments will fluctuate as a result of changes in market interest rates.
Liquidity risk – The risk that the Group will have difficulty meeting obligations in relation to financial instruments.
Credit risk – The risk of counterparties in connection with financial instruments failing to repay their liabilities, thus incurring a loss on the other party.
Other price risks – The risk that the fair value of or future cash flows from a financial instrument will fluctuate as a result of market price changes other than those attributable to interest rate risks or currency risks, regardless whether such changes are due to factors relating to the individual instrument or its issuer or to factors affecting all comparable instruments traded in the market.
Capital management risk – The risk of an undesirable proportion of equity to net liabilities.

Other risks:

The risk of incidents involving the Company’s owned vessels.
The risk of a lack of IT functionality.
The risk of not being able to attract and retain key staff.

Commercial risks

Purchase and sales price fluctuations

The ongoing expansion of the fleet of owned vessels is associated with certain risks, particularly in relation to changes in the value of the vessels.

At the end of 2007, the Company held purchase options for 75 vessels (71 vessels). Risk is associated with the exercise of these options, in that the market value of the vessels may drop subsequent to acquisition. The risk is judged to be limited for the time being, however, as the majority of the options were entered into on favourable terms in lower freight markets. The Company’s newbuilding programme was also entered into on favourable terms.

The value of the purchase options and the assumptions applied in the calculations are set out in the section ”Fleet development and corporate values” in the management’s review.

Freight rate fluctuations

The Company manages commercial risk from fluctuations in freight rates and imbalances in the ratio of cargo-to-cargo capacity (vessels) on a general level by employing some of its vessels on fixed-term COAs and timecharters.

One way of covering is to enter into COAs, which typically have a term of twelve months, although certain contracts have terms of several years. At the end of 2007, the value of future COAs corresponded to freight income of USD 1,012 million (USD 288 million). Most of the contracts covered 2008 and 2009, but a few of them ran to 2013. For more information, see note 38 ”COAs and operating lease income”.

NORDEN also uses FFAs to supplement the actual, long-term employment of the vessels. They typically run twelve months forward and are used when physical alternatives are more expensive or unattainable. At the end of 2007, the Company had bought FFAs with a contract value of approximately USD 93 million net (sold USD 27 million) up to and including 2008. For further information, see note 39 ”Financial instruments”.

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