BOARD OF DIRECTORS’

REPORT 2016

The consolidated 2016 net result amounted to USD 100 million, compared with a loss of USD 36 million in 2015. The 2016 result included positive effect from sale of the Oman terminal of USD 44 million. Total assets by year-end amounted to USD 1,883 million, down from USD 1,943 million by the end of 2015. The cash flow from operations was USD 122 million in 2016, compared with USD 94 million in 2015, with cash and cash equivalents of USD 164 million by end of 2016, excluding joint venture companies. Total equity by the end of 2016 amounted to USD 719 million compared to USD 645 million by the end of 2015, and the equity ratio increased to 38.2% from 33.2% during the year.

The Board is satisfied with delivering improved financial results, primarily as a consequence of the many successful initiatives taken by the organisation during the last two years. Odfjell embraces an investor-friendly dividend policy. Based on the Company's 2016 results, including the profit from the sale of the Oman terminal, the Board recommends a dividend of NOK 1.50 per share, totalling NOK 117,832,950. Going forward, the Company targets regular dividend payments at a sustainable level. However, we will take into consideration appropriate limits on leverage, capital expenditure plans, financing requirements, appropriate financial flexibility and anticipated cash flows.

The operating result (EBIT) increased to USD 130 million in 2016, from USD 28 million in 2015. We delivered improved financial performance both from our chemical tanker business and from the tank terminals, however the improvement in the results from our chemical tankers was due to loss on derivatives in 2015. The underlying performance of our gas carriers is still a marginally positive business, and we expect to exit this segment in due time.

Odfjell’s balance sheet was strengthened during 2016, both with regards to the equity and the cash position. We refinanced long-term debt of about USD 216 million during the year including a bond issuance of NOK 500 million in September 2016. Odfjell issued a NOK 700 million bond in January 2017, where we experienced significant price improvement since the issuance in September 2016. The new bond was also used to repurchase part of a NOK 600 million bond maturing in April 2017. Besides this bond maturity, we have only limited refinancing needs in 2017.

The significant improvement in financial performance was despite challenging markets. The Board is pleased to see the continued effects from Project Felix, the efficiency project implemented in 2015, and the increasing effects from Project Moneyball, which focuses on operational excellence and reduced time spent in port.

Chemical spot freight rates were rather stable throughout the first half of the year, but we experienced a sharp reduction in spot rates during the second half of 2016, due to a softening CPP market and subsequently more challenging market conditions. During 2016, 162 chemical tankers and swing tonnage vessels were delivered, and 37 vessels were scrapped, effectively growing the total fleet with 125 vessels. This also contributed to increased competition and the lower freight market towards the end of the year. 

Total volumes carried in 2016 were 13.5 million tonnes against 13.6 million tonnes in 2015. This constitutes an approximately 1% reduction in volumes. Odfjell had a contraction of trading days of approximately 4%. We witnessed a gradual worsening through the year’s first three quarters, but the CPP market did show some improvements at the end of the year.

Activity and nominations under our Contracts of Affreightment (CoAs) were on average above the levels in 2015, but the variance in nominations increased, reflecting less predictability in CoA volumes. The contract coverage for the year has on average been 55.5% of total volume shipped against 51.5% in 2015. Volumes shipped under CoAs reduced significantly in the fourth quarter, forcing us to rely more on the weaker spot market. 

The average bunker fuel prices increased substantially during the year and negatively impacted our margins. Most of the bunker price exposure is hedged through Bunker Adjustment Clauses (BACs) in our COAs in addition to moderate bunker hedging through derivatives.

Net fleet growth during the year for chemical tankers as a whole was 6.8% while the core chemical deep-sea fleet grew by about 12.4%. This is considerably above average annual growth over the last decade. Going forward, we foresee the net fleet growth being reduced to about 5.5% in 2017 and about 3% in 2018 and 2019. The market will probably continue to be under pressure in 2017 as the market absorbs the many newbuilding, but beyond that, we believe the market will be fairly well balanced as demand will outgrow supply after 2018. At the end of 2016, our total chemical tanker fleet was 73 vessels, including 28 time-chartered, five bare-boated and 40 owned vessels. We are predominantly a deep-sea operator with 66 of the 73 vessels being more than 12,000 dwt. Of the remaining smaller vessels, we own four of the seven vessels.

In November 2016, we announced that we have signed shipbuilding contracts with China Shipbuilding Trading CO., LTD and Hudong-Zhonghua Shipbuilding (Group) CO., LTD. for the construction of  a series of four chemical tankers with stainless steel cargo tanks. The vessels are 49,000 dwt and have a cargo capacity of 54,600 cbm. This makes them the world's largest stainless steel chemical tankers. The first vessel is expected to be delivered in June 2019 and the following vessels with three months intervals. The capital commitments will be USD 60 million per vessel. This is a significant step in solving our tonnage replacement needs. The vessels will be the most efficient stainless steel chemical tankers available, and they are designed to be good for the environment, good for our customers and a good investment for our shareholders.

The Group re-entered into the LPG market in 2012 by acquiring two LPG/Ethylene carriers, and our joint venture Odfjell Gas ordered eight newbuildings in 2014, to be delivered between 2016 and 2017. Due to substantial delays, the four first vessels have been cancelled with guarantees fully refunded.  There are also material delays in the construction of the four remaining orders.

Our tank terminal business improved in 2016, with the change mostly attributed to the improved results from our tank terminal in Rotterdam (OTR). The terminal in a new industrial zone near Tianjin, China, which was mechanically completed in early 2015, finally received its permit in November 2016 and has started up operations. Our share in the Oman terminal was divested in December 2016. The divestment is in line with a strategy to focus on the terminals where we have managerial control of the assets, and to further invest in growth opportunities in our core markets such as Houston and Rotterdam. 

Since 9 May 2016 the Board has comprised of Laurence Ward Odfjell (Chairman), Christine Rødsæther, Jannicke Nilsson, Åke Gregertsen, Annette Malm Justad, Klaus Nyborg and Hans Smits. The Audit Committee has consisted of Board Directors Åke Gregertsen (Chair), Jannicke Nilsson and Klaus Nyborg. The Nomination Committee has consisted of Arne Selvik (Chair), and Board Directors Christine Rødsæther and Laurence Ward Odfjell.  

CORPORATE SOCIAL RESPONSIBILITY

Since Odfjell signed up for the UN Global Compact (UNGC) programme, there has been continued focus on Corporate Social Responsibility from financial and commercial stakeholders. Annually we submit Communication on Progress to the UNGC secretariat, including current and new goals for the coming period. Our policies and other lead documents such as Code of Conduct, Competition Law Manual and Corporate Supplier Code Principles have been revised and harmonised with the programme. We have also been involved in projects in the Maritime Anti-Corruption Network (MACN), which aims to fight corruption on local and regional basis. 

QUALITY, HEALTH, SAFETY AND ENVIRONMENT (QHSE) 

In 2016, we had no fatality or work related injuries resulting in permanent disability. The general QHSE performance in 2016 was deemed satisfactory, but we recognise the need for vigilant attention. In terms of personal safety indicators, our shipping-related Lost-Time Injury Frequency (LTIF) indicator was 0.88 in 2016. The indicator represents seven Lost Time Injuries, the same as in 2015, where the LTIF was 0.72. Our goal for LTIF is to reach zero. In 2016 we saw a reduction in the severity of personnel injuries on Odfjell managed vessels. The LTIF of the terminals operated and managed by Odfjell was 0.26 in 2016, a slight improvement from 0.30 in 2015. The focus on further improvements has been reinvigorated second half of the year.

There have been no security incidents on Odfjell ships in 2016, although piracy and armed robberies continue being a concern. Privately contracted security personnel are still being used to protect some transits.

Fuel efficiency measures and subsequent reduced emissions continue to have high focus. Status and progress are monitored through the Annual report, Communication on Progress and participation in the Carbon Disclosure Project (CDP).

Based on the bunker consumption of 73 vessels, the total emissions of CO2 in 2016 amounted to close to 1.3 million tonnes. Based on all consumption in 2016 (both in port and at sea), Odfjell’s vessels emitted on average 0.12 grams of SOx per tonne cargo transported one nautical mile (0.11 in 2015). The fleet emitted a total of 8,300 tonnes SOx, down from 8,600 tonnes in 2015. The Energy Efficiency Operational Indicator (EEOI) for the Odfjell fleet was 17.47 grams of CO2 per tonne cargo transported one nautical mile (g/tnm). This is 2 % higher than in 2015, and is explained by operation of the fleet in a higher speed mode than in previous year.

In 2015, we decided to upgrade the propulsion line on our Kvaerner and Poland class vessels in order to further reduce fuel consumption and emissions by more than 20%. New energy efficient propeller blades, rudder-bulb and technical upgrades of the main engine, turbo chargers and shaft generator gear were part of the project. The savings have been confirmed by full scale sea trials. The retrofitted vessels are now amongst the most energy efficient chemical tankers in the world, and have achieved the highest score on the RightShip energy rating, A+. Four vessels were retrofitted in 2015 and nine in 2016. The remaining six vessels will be upgraded in 2017.

In cooperation with the Financial control unit, IT and the Terminals division, Odfjell Corporate QHSE conducts system audits on operative and staff units to ensure compliance with regulatory, corporate and management level requirements and expectations. The scope of the audit programme shall primarily verify compliance with corporate and regulatory requirements in our industry. 

Odfjell has not sold a ship for recycling in 2016. Odfjell uses the Baltic and International Maritime Council’s (BIMCO) new standard recycle contract (RECYCLECON), and obtain 'Green Passport' for all ships before the age of 25 years. Odfjell uses yards that are certified as compliant with the Hong Kong Convention and the 2012 Guidelines for Safe and Environmentally Sound Ship Recycling, and we also require that the recycling yard follows a 'Ship Recycling Plan'.

CORPORATE GOVERNANCE

The framework for our corporate governance is the Norwegian Code of Practice for Corporate Governance of 30 October 2014. Odfjell is committed to ethical business practice, honesty, fair dealing and compliance with all laws affecting our business. This includes adherence to high standards of corporate governance. The Board’s statement regarding corporate governance is a part of the Group’s Annual Report. Our Corporate Social Responsibility Policy also encompasses high focus on quality, health, safety and care for the environment as well as human rights, non-discrimination and anti-corruption. The Company has its own Code of Conduct that addresses several of these matters. All Odfjell employees are obliged to comply with the Code of Conduct.

BUSINESS SUMMARY

We remain committed to our long-term strategy of enhancing our position as a leading company in the global market for transportation and storage of bulk liquid chemicals, acids, edible oils and other special products.

By focusing on safe and efficient operation of a versatile and flexible fleet of global and regional chemical tankers with cargo consolidation at our tank terminal network, we aim to further enhance product stewardship in the solutions we provide to our customers. The fleet is operated in complex and extensive trading patterns, meeting our customers' demand for safety, quality and the highest standards of service. We have a critical mass that enables efficient trading patterns and optimal fleet utilisation. The industry in general continues to suffer from congestion in port due to lagging investment in port infrastructure.

Comments to segments figures below are by the proportionate consolidation method. 

Chemical Tankers

Gross revenues from our chemical tanker activities amounted to USD 832 million in 2016, a decrease from USD 940 million in 2015. EBITDA came in at USD 188 million and EBIT at USD 98 million, compared with USD 147 million and USD 37 million respectively in 2015. Odfjell SE corporate related costs are included in the general and administrative expenses for chemical tankers. Total assets at year-end amounted to USD 1,544 million. 

Operation of chemical tankers is complex. During 2016 our ships transported in excess of 600 different products comprising more than 5,000 individual parcels. Unlike vessels in most other shipping segments, our vessels call several berths in each port, both for loading and discharging. This is a time-consuming and costly process. During the year, we have initiated several projects to enhance port efficiency and service to customers. More successful consolidation of cargoes and efficient port operations are benefitting our customers, the Company and the environment.

In combination with, and as an extension of our worldwide deep-sea service, our regional shipping activities encompass three distinct geographical regions; Far East, South America East Coast and South America West Coast. Our largest regional operation is in Asia, covering a strategically important growth area for both our shipping and storage business. We currently operate nine ships in the region, in trades between Southeast Asia and the Far East, and to and from Australia/New Zealand.

In South America, a total of five vessels are managed and operated by our wholly owned Brazilian subsidiary Flumar. One vessel is directly owned in Flumar, while the other vessels are on internal charter parties from other Odfjell companies. The fleet is supplemented by our deep-sea vessels trading in South America. Odfjell also owns and operates two smaller chemical tankers which mostly serve the mining industry on the west coast of South America. 

Odfjell has been actively promoting high safety standards for chemical tankers since the early days of the chemical tanker industry. We continue to take a proactive approach towards international regulatory bodies and major customers, and we continue to address key issues openly with all stakeholders in order to enhance safety standards.

Gas Carriers

Gross revenues from our share in gas carrier activities in 2016 came in at USD 12 million, compared with USD 18 million in 2015. EBITDA declined from USD 4 million in 2015 to USD 3 million in 2016. EBIT for 2016 amounted to negative USD 7 million, mainly due to impairments, compared with USD 3 million in 2015.

Odfjell re-entered into the LPG market in 2012 by acquiring two LPG/Ethylene carriers, and the joint venture Odfjell Gas ordered in 2014 in total eight vessels in addition for agreed delivery between 2016 and 2017. Due to substantial delays at the yard, the four first vessels have been cancelled, and there are also material delays in the production of the four remaining orders. All instalments including accrued interests on cancelled contracts have been repaid. Instalments paid on the remaining orders are secured by refund guarantees from reputable financial institutions.

Tank Terminals

Since November 2013, Odfjell’s tank terminal business is owned through a joint venture with Lindsay Goldberg through our joint investment in Odfjell Terminals BV. Only Odfjell’s small tank terminal investment in Iran is not included in the joint venture. 

All terminals delivered stable earnings in 2016, with the terminal in Rotterdam (OTR) showing a full year positive operating result for the first time since the safety shutdown in 2012. Gross revenues from our share of the tank terminal activities came in at USD 123 million compared with USD 112 million in 2015, while our share of EBITDA for 2016 amounted to USD 47 million, up from USD 40 million in 2015. Our share of EBIT for 2016 amounted to USD 53 million, compared with an EBIT of USD 4 million over the previous year. Included in the 2016 EBIT is the gain of USD 44 million from the sale of the Oman terminal.

At year-end 2016, the book value of our share of tank terminal assets was USD 578 million, compared with USD 629 million per end of 2015.

Odfjell’s existing tank terminals are located in Rotterdam (Netherlands), Houston and Charleston (USA), Dalian, Jiangyin and Tianjin (China), Ulsan (Korea), Singapore, Antwerp (Belgium), and in Bandar Imam Khomeiny (Iran). Additionally, we have a beneficial co-operation agreement with a related party that partly owns 14 tank terminals in South America.

Odfjell Terminals Rotterdam (OTR) reported substantially improved results in 2016, showing a positive EBITDA. In 2015, the facility commissioned additional tank capacity and significantly increased the volumes processed by the distillation units. EBITDA at OTR on a 100% basis was positive USD 11.6 million in 2016, compared with negative USD 9 million in 2015 and negative USD 80 million in 2014.

Odfjell Terminals Houston (OTH) showed steady results with a new 17,100 cbm tank pit (Bay 10) operational for the full year. OTH’s total capacity is 380,000 cbm.

The construction of the terminal in a new industrial zone near Tianjin, China was mechanically complete in 2015, with the jetties receiving trial operation permits from authorities. The explosion in the old Port of Tianjin in August 2015 resulted in a suspension of permitting for all hazardous material operations in the greater area of Tianjin. This affected also the final permit for our new terminal, even if we are located far from the affected area. The permitting process resumed in the course of 2016 and the trial permit for the tank farm was received in October 2016 after which operations commenced. 

In December 2016, Odfjell Terminals BV sold its 29.75% indirect ownership in Oiltanking Odfjell Terminals & Co. LLC in Oman for about USD 130 million, resulting in a net gain of USD 86 million. The divestment of the Oman terminal is in line with a strategy to focus on the terminals where we have managerial control of the assets and to further invest in growth opportunities in our core markets, such as Houston and Rotterdam. We are currently reviewing potential expansion projects where we target long term customer take or pay contracts. Such opportunities will be financed by project financing and potentially also by divestment of non-operated terminals.

Management continues to focus on utilisation of the assets. Average occupancy of commercially available tanks in 2016 was 96% versus 97% in 2015. The high occupancy rate is driven in part by a contango in the petroleum market and the market is still showing strength into 2017. Management will continue to gradually introduce additional tank capacity at OTR. OTR’s distillation business has seen a gradual ramp up of utilisation of the new expanded capacity in 2016.

PROFIT & LOSS FOR THE YEAR - CONSOLIDATED

The Group’s accounts have been prepared in accordance with IFRS.

Gross revenues for the Odfjell Group came in at USD 825 million, down 11% from the preceding year. The consolidated result before taxes in 2016 was USD 107 million, compared with a loss of USD 30 million in 2015. The tax result in 2016 amounted to an expense of USD 7 million, compared with an expense of USD 5 million in 2015.

EBITDA for 2016 totalled USD 218 million, compared with USD 137 million the preceding year. EBIT was USD 130 million in 2016, compared with USD 28 million in 2015. The net result for 2016 amounted to USD 100 million, compared with a loss of USD 36 million in 2015. In 2016, we recognised an impairment of USD 12 million related to sale and planned sale of ships. In addition, we had a gain related to sale of the Oman terminal of USD 44 million (included in share of JV’s net result by the equity method) and a gain of USD 12 million related to sale- and lease back of our head office building. In addition, the result was influenced by impairment of USD 25 million related to ships and terminal assets in 2016. 

Net financial expenses for 2016 totalled USD 23 million, compared with USD 58 million in 2015. The relatively low financial expenses can mainly be explained by a gain of USD 21 million on the termination of a financial lease in 2016. The average USD/NOK exchange rate in 2016 was 8.41, compared with 8.07 the previous year. The USD depreciated against the NOK to 8.65 by 31 December 2016, from 8.80 at year-end 2015. The cash flow from operations was USD 122 million in 2016, compared with USD 94 million in 2015. The net cash flow from investments was positive USD 57 million, mainly related to sale and dividend payments from subsidiaries. The cash flow from financing activities was negative USD 131 million.

Odfjell SE delivered a net result for the year of USD 20 million. The net profit after proposed dividend will be distributed to Other Equity. As of 31 December 2016, total retained earnings amounted to USD 632 million.

The Annual General Meeting will be held 11 May 2017 at 16:00 hours at the Company’s headquarters in Bergen, Norway.

According to §3.3 of the Norwegian Accounting Act we confirm that the financial statements have been prepared on the going concern assumption. 

SHARES AND SHAREHOLDERS

The Company is an SE (Societas Europaea) company subject to Act No 14 of 1 April 2005 relating to European companies. The Company’s registered office is in the city of Bergen, Norway.

The object of the Company is to engage in shipping, ship agency, tank terminals, real estate, finance and trading activities, including the transportation of freight in the Company’s own vessels or chartered vessels, the conclusion of freight contracts, ownership and operation of tank terminals, as well as investment and participation in other enterprises with a similar object and other activities related thereto.

Total shares as of end of December was 86,768,948 shares, with 65,690,244 A-shares and 21,078,704 B-shares. The total shares include Odfjell SE treasury shares of 5,891,166 A-shares and 2,322,482 B-shares. 

By end of December 2016, Odfjell A- and B-shares were trading at NOK 29.30 and NOK 28.00 respectively, against NOK 28.30 and NOK 26.50 respectively at the close of 2015. In the same period the Oslo Stock Exchange Benchmark Index gained 12% and the Transportation Index also gained 17%. As of 31 December 2016, Odfjell SE had a market capitalisation of around NOK 2,277 million, which was equivalent to around USD 263 million.

KEY FIGURES 

The return on equity for 2016 was 14.6% and the return on total assets was 7.9%. The corresponding figures for 2015 were negative 5.6% and positive 0.4% respectively. The return on capital employed (ROCE) was positive 7.9% in 2016. Earnings per share in 2016 amounted to USD 1.27 (NOK 10.69), compared with negative USD 0.41 (negative NOK 3.31) in 2015. The cash flow per share was USD 2.4 (NOK 20.17), compared with USD 0.61 (NOK 4.89) in 2015. The interest coverage ratio (EBITDA/net interest expenses) was 4.75, compared to 3.3 in 2015.

FINANCIAL RISK AND STRATEGY

Our financial strategy shall be sufficiently robust to withstand prolonged adverse conditions, including long-term downturns in our markets or challenging conditions in the financial markets. Odfjell adopts an active approach to managing risk in the financial markets. This is achieved through funding from diversified sources, maintaining high liquidity or credit reserves, and through systematic monitoring and management of financial risks related to currencies, interest rates and bunkers. Hedging instruments are used to reduce the Company’s exposure to fluctuations in the above-mentioned financial risks. At the same time, it may limit our upside potential from favourable movements in these risk factors. We also monitor the risk related to market valuation of the hedging instruments and the effect this has on the equity ratio. 

The largest single cost component affecting time-charter earnings is bunkers. In 2016, this amounted to more than USD 102 million, ignoring the effect of any bunker adjustment clauses and bunkers hedging in place, equivalent to 37% of voyage costs. A change in the average bunker price of USD 50 per tonne equals about USD 19.8 million per year (or USD 909 per day change in time-charter earnings for those ships where we have a direct economic interest). A certain portion of our bunker exposure is hedged through bunker adjustment clauses in the Contracts of Affreightment (CoAs). As per 31 December 2016, Odfjell had hedged about 7% of its 2017 bunker exposure, through swaps at an average price of about USD 224 per tonne. In addition, bunker clauses in CoAs cover above 50% of the exposure. 

All interest-bearing debt, except bonds in the Norwegian bond market and debt borne by tank terminals outside the USA, is denominated in USD. Interest rates are generally based on USD LIBOR rates. With our current interest rate hedging in place, about 19% of our loans were at fixed interest rates at year end.

The Group’s revenues are primarily denominated in USD. Our currency exposure relates to the net result and cash flow from voyage-related expenses, ship-operating expenses and general and administrative expenses denominated in non-USD currencies, primarily NOK for our shipping business. We have estimated that a 10% decrease of the USD against the NOK would reduce the pre-tax 2016 result by around USD 6 million, ignoring the effect of any currency hedging in place. Tank terminals outside USA and our regional European shipping trade generate income in non-USD currencies.

Our currency hedging at the end of 2016, under which we sold USD and purchased NOK, covers about 52% of Odfjell’s 2017 NOK exposure. Future hedging periods may vary depending on changes in market conditions. At 31 December 2016, the average USD/NOK exchange rate for open hedging positions for 2017 was 8.51.

LIQUIDITY AND FINANCING

Total interest-bearing debt as at 31 December 2016 was USD 1,042 million, while cash and cash equivalents amounted to USD 174 million, both figures excluding joint venture companies. At the same date the equity ratio, using the Equity consolidation method, was 38.2% compared with 33.2% per end 2015.

Odfjell’s balance sheet was strengthened during 2016, both with regards to the equity and the working capital. Odfjell SE Shipping/Corporate refinanced long-term debt of about USD 216 million during the year, including a bond issuance of NOK 500 million in September 2016. Odfjell issued a NOK 700 million bond in January 2017, where we experienced significant price improvement since the issuance in September 2016. The new bond was also used to repurchase parts of the NOK 600 million bond maturing in April 2017. Besides this bond maturity, we have only limited refinancing needs in 2017. We secured all the new mortgage loans at market terms with several of our long-term relationship banks. 

The average maturity of the Group’s interest-bearing mortgage debt excluding finance leases and bonds is about four years, of which 11.8 % of the interest-bearing debt matures in 2017. 

ORGANISATION, WORKING ENVIRONMENT AND JOB OPPORTUNITIES

Odfjell aims to be a company which attracts, develops and retains competent employees. Based on our core values: Professional, Pro-Active, Sustainable and Innovative, we conduct our business to high quality, safety and environmental standards both at sea and onshore.

Odfjell maintains a policy of providing employees with equal opportunities for development of skills and new challenges within our Company, irrespective of ethnic background, gender, religion or age. 

We carry out and follow up employee engagement surveys and yearly performance appraisals at the headquarters in Bergen and at our overseas offices. In addition, we continue our programme for improved health care for seafarers, focusing on exercise and a healthy diet on board. The work environment on shore and at sea is considered good, as indicated by our high retention rates and below industry absence rates.

Odfjell ensures a non-discrimination work environment, also within recruitment, promotion or wage compensation. Of about 147 employees at the headquarters in Bergen, 71% are men and 29% are women, whilst the corresponding global figures (about 723 employees in our fully owned onshore operations) are 72% and 28% respectively. Three of the seven Directors of the Board of Odfjell SE are women.

In 2016 the recorded absence rate at the headquarters has decreased to 1.6% from 1.9% in 2015. For our own pool of Odfjell and Flumar seafarers the absence rate in 2016 was 1.4%.

The Board would like to thank all employees for the many positive achievements in 2016 and is looking forward to continue the improvements in 2017.

REMUNERATION OF THE MANAGEMENT GROUP

Salary and other remuneration to the CEO shall be determined by the Board. A description of the remuneration of the Management Group and the Group’s remuneration policy, including the scope and organisation of bonus and share-price-related programmes, is given in the Board of Directors’ statement of guidelines for the remuneration of the Management Group. A ceiling has been set for performance-related remuneration. The Board of Directors’ statement of guidelines is considered by the General Meeting and made available to shareholders together with the notice of the Annual General Meeting. See Note 22 to the Odfjell Group accounts for details about the remuneration of the Management in 2016.

MARKET DEVELOPMENT

2016 was a year where we experienced relatively modest economic growth in most of our core markets. 

The US is our single most important hub for exports and imports.  We do depend on the economic development in the United States and the differences in growth rate in the US and other economies, facilitating trading opportunities and arbitrage. The US GDP growth increased through 2016, but decreased towards the end of the year, predominantly due to a contraction in export services. In addition, the American election may indicate more protectionism going forward. However, expectations of higher domestic spending and need for increased imports, on top of an economy which is already at a relatively high utilisation rate, may have a positive impact.

All relevant regions, except the South American region in general and Brazil in particular, experienced economic growth. Brazil, which is a key area in our trades, is in the midst of a deep depression which also affects Odfjell. South American imports and exports have as a consequence declined. In terms of the global competitiveness index, the World Economic Forum is reporting significant reduction in competitiveness both in Brazil and Argentina, which are main exporters and importers of chemicals in liquid bulk and hence also important geographic locations for Odfjell.  

For the other markets we have experienced relatively stable volume developments.

As for the tanker markets in general, 2016 has been a challenging year. The large crude oil tankers have experienced a sharp drop in spot earnings throughout the year, and also a corresponding decline in longer term time charter rates and asset prices. This was also the trend in the larger clean market (LR1 + LR2) and the MR market where rates were periodically below the 10,000 USD/day mark. The time charter rates have followed the same pattern, and have weakened throughout the year. We have also observed the declining trend in the chemical tanker markets, but given the more diversified nature of our business, the declines are not as significant as in other tanker segments. In general, the opportunities in 2016 were on the asset side, which we acted on when we ordered four 49,000 dwt chemical tankers with stainless steel capacity at the Hudong-Zhonghua Shipbuilding in China, including two plus two options. We have also entered into several new charter parties during the year.

For the general market, Clarkson Shipping Intelligence reported an increase in ton-mile demand of 4.3% in our sector, so fundamentally demand is still growing. During 2016, the overall net chemical fleet growth was 6.8%. Analysts’ forecast shows on average a fleet growth of 3.8% in 2017, 1.9% in 2018 and 1% in 2019. IMF forecasts suggest that the global economy will expand by about 3.4% in 2017 and 3.6% in 2018. 

COMPANY STRATEGY AND PROSPECTS

Odfjell strives to provide safe, efficient, and cost-effective chemical tanker and tank terminal services to our customers worldwide. Close co-operation between our shipping activities and our tank terminals offers operational and commercial benefits. In addition, the tank terminals themselves have proven a stabilising factor in our overall financial performance over time, as earnings from this area are less volatile compared to earnings from our shipping activities.

Even though we experienced more challenging markets towards the end of 2016, 2015 and 2016 have been relatively good years in the chemical tanker industry. The supply of new tonnage has however increased during 2016 and into 2017, which is leading to tougher competition. Although ordering of new chemical tankers was drastically reduced the last two years compared to previous years, the core deep-sea fleet order book is still 19% of current fleet. For the total global chemical tanker fleet, the order book is around 9% of the current fleet. As a consequence thereof, we expect the supply/demand imbalance to persist in the near term. 

World GDP growth, one of the main factors affecting overall chemical tanker demand, is expected to grow steady, but moderate. The latest economic outlook sees only a modest recovery in advanced economies and slower activity in emerging markets, with the world economy being likely to expand no faster in 2017 than in 2016. 

Our main risks relate to very competitive markets also in 2017, fuel costs and potential further increased order book within our core segment. We also see an increased risk of growing protectionism on intercontinental trade and cooperation, which could potentially add risk to all shipping segments, including the chemical tanker markets.

However, in a longer term perspective we continue to believe that the chemical tanker market is fairly balanced as the demand growth will begin to outgrow supply as the addition of new tonnage is trailing off. 

Going forward, the shipping business, both in general and for the chemical tankers, will continue to face new challenges and opportunities. Amongst others, we must carefully consider consequences of the new requirements on sulphur emissions coming into effect from 2020, and the new ballast treatment regulations coming into force from September 2017. We also expect to see continued digitalisation, where increased use of information and communication technology and use of big data will drive the industry further. Odfjell has a history of being at the forefront of the industry, and we intend to take an active part in shaping our industry going forward.

Odfjell has been through a transformation over the last two years. Project Felix was a success with USD 110 million in annual savings, and Project Moneyball – which focuses on operational excellence and reducing time in port – is progressing as planned. Based on this, our competitiveness has improved substantially, and at the same time we have strengthened our balance sheet.

In connection with the fourth quarter report for 2016, Odfjell introduced our new strategy for 2017 and beyond, the Odfjell Compass. There are three guiding principles for our strategy. The first and most important is that we do not compromise on safety. The second is that chemical tankers and terminals are our core business, and the third is that to be a leading world class player, we need to have world class ambitions in everything we do. 

The key focus in the Odfjell Compass will be to continue with our tonnage renewal and fleet growth plans for our advanced chemical tanker fleet, combined with high quality service and operational excellence at sea and on shore. Furthermore, we aim to return to meaningful profitability levels at the terminals through the ’Value creation programme’. At the same time, we will continue to build financial strength with a competitive cost of capital.

Our mission is clear: Our core business is handling hazardous liquids, safely and more efficiently than anyone else in the industry. 

It is time to shape  the future!