Last checked at 11 Apr 2019 10:00
2018 Management Report
External Environment
The dry bulk shipping market remained stable in 2018. The decline in newbuilding investment led to the recovery of balance in dry bulk shipping capacity, where supply had exceeded demand for years. Meanwhile, increasingly stringent environmental regulations and the cost of funds continued to dampen shipowners' willingness to invest. As a result, the newbuilding and secondhand markets did not rebound as strongly as the freight market. The supply of dry bulk carriers is expected to continue to stagnate in the near future.
In particular, the upcoming 2020 global sulphur limit creates a considerable degree of uncertainty for the future of the shipping industry. There is still room for improvement in both desulfurization equipment and low-sulphur fuel in terms of supply, cost, and technology. The industry has so far been unable to find optimal solutions in response to the new regulations. This uncertainty has a certain degree of impact on long-term leasing agreements and investment in newbuilding. On the other hand, the Ballast Water Management Convention, entering into force in 2019, is expected to trigger accelerated replacement of old vessels.
Another key variable in the dry bulk shipping market is the 2018 global economy. The generally positive outlook helps hold freight rates stable in the market. However, the escalating US-China trade war is having a certain degree of impact on the future of shipping. US-China trade accounts for 3% of the global trade volume. Less than half faces tariff changes due to the trade war, and even a smaller portion involves goods shipped by dry bulk carriers. Nevertheless, the trade war may initiate a chain reaction that includes the rise of protectionism and disruption of growth momentum in the US and China economies. The shipping market will have to pay close attention to these issues as they develop. However, based on the impact on the freight rates, trade uncertainties have not caused greater pressure on dry bulk shipping.
2018 Business Results
In 2018, we had 8 new build ships, hired 1 new bareboat, added 1 to ships under management, disposed 2 ships of our own, and terminated management of 2 ships. The number of ships in our fleet undergoes a net increase of 6 from 124 at the beginning of the year to 130 at the end of the year. Old ships are being replaced at a slower rate than expected due to adverse market conditions and the relative lack of suitable opportunities for ship sale.
The shipping market has a clearly more positive outlook of the economy in 2018. Our newbuilding leases generated on average a gross margin of 40% or higher. Recovering market conditions at the beginning of the year have allowed contracts to be renewed at generally better terms. The average rent after renewal is 20% higher. As a result, the operating profit margin has shown significant improvement by rising from 17% in 2017 to 26% in 2018.
On the other hand, in terms of nonoperating income, we only received US$6 million in dispute settlement amid a stable market and the lack of speculative investment. Meanwhile, the Japanese Yen is relatively stable in the foreign exchange market. A falling New Taiwan Dollar has led to a small positive yield on the TWD denominated bonds we have issued this year. The total exchange gain in the year is less than US$1 million. Interest expenses are significantly higher, however, due to increased interest rates. Overall, our net operating profit is US$115 million and net profit is US$60.01 million in the year.
2019 Business Plan
We expect to have 5 more new ships delivered in 2019. They include 3 supramax and 2 handysize. Since a slow recovery can be expected this year, we plan to start looking for profitable long term contracts in the year.
All our new buildings in 2019 are new energy efficient models built by first class Japanese builders, such as Imabari, Namura, and Kawasaki, and comply with the latest environmental regulations and requirements. We have also started to deploy vessels in compliance with Tier III NOx emission standards. So far we have made 6 vessels that comply with the new standards, and delivery is expected to take place starting in 2020. Given the Tier III emission standards are the shipbuilding standards of the future, we expect to take action quickly while the market recovers, and try to stay one step ahead of our competitors in securing a cost advantage by buying when ship prices are still low.
In response to the Ballast Water Management Convention that is to come into force in 2019, we have completed installation on 74 vessels, and have made plans to install the equipment on 11 existing and 5 new vessels in 2019.
Apart from changing market conditions, challenges that we face in the near future include following closely developments in finding the best way to meet the sulphur limit requirement in 2019. Our fleet is currently meeting the requirement by switching to low sulphur fuels. However, we will also invest time and resources in the collaborative development of desulfurization devices and the study of the effects of low sulphur fuels on marine engines.
A large number of uncertainties remain in international political and economic conditions in 2019. The capital market continues to be stagnant with increased financing costs. Nevertheless, given relatively stable freight rates, we will try to find suitable opportunities to sell ships. Ship sales will not only facilitate replacement of old vessels, but also hopefully reduce our exposure to interest rate volatility by disposing assets to improve our capital structure.
Chairman James Lan
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