A deliberate strategy and procedure for risk mitigation will, over time, impact profitability in a positive way. Wallenius Wilhelmsen has established a group wide enterprise risk management model and maps all main risks on a regular basis. On a quarterly basis, management presents a detailed risk assessment, including mitigating actions, covering all business units and functional areas, to the Board of Directors.
The responsibility of governing bodies, management and employees is to be aware of the current environment in which they operate, implement measures to mitigate risks, prepare to act upon unusual observations, threats or incidents, and proactively try to reduce potential negative consequences. Risk evaluation is integrated in all business operations, both at group and business unit level. Wallenius Wilhelmsen has internal controls, systems and processes for handling financial, market and commercial, operational and regulatory risks.
The main financial risk exposures for Wallenius Wilhelmsen are interest rate risks, currency risks, and bunker price development. Wallenius Wilhelmsen seeks to hedge between 30-70% of the net interest rate exposure, predominantly through interest rate swaps and fixed rate loans. The hedge ratio is currently about 60%.
The dominant currency for both revenues and costs across the group is USD, which is also the functional currency. The majority of the currency exposure arises on the cost side in the ocean operating companies with EUR, KRW, JPY, SEK, NOK, GDP and CNY representing about 25% of the operating costs. As a main principle, Wallenius Wilhelmsen does not use financial instruments to hedge currency risk in the operating entities, but assesses the merits of doing so in periods when the USD is historically strong compared to other currencies.
As a general principle, BAF in customer contracts is the main way of managing bunker oil price risk. In the short term, the group is exposed to changes in the bunker price, since BAF is calculated based on the average price over a historical period, and then fixed during an application period, creating a lag effect. Therefore, the implementation of IMO 2020 and the transition from HFO 3.5% to VLFSO represents a risk for Wallenius Wilhelmsen as the price for compliant fuel could increase sharply in the transition period creating a negative lag effect. To mitigate the risk, the group has locked in the forward spread between HFO 3.5%, and MGO for about one third of the bunker volumes in the period November 2019 – April 2020.
For a detailed assessment of financial risk, see ‘note 22 – financial risk’.
Market and commercial risk
Demand for the ocean and land-based service offerings are cyclical and closely correlated with global economic activity in general and deep-sea transportation of automotive and high & heavy equipment in particular. Changes in the global economy are therefore highly decisive for the development of Wallenius Wilhelmsen’s volumes and financial performance.
As such, the ongoing trade tension and possibility of new tariffs on automotive imports to the US represents a risk for Wallenius Wilhelmsen. A short-term direct effect of some reduction in automotive volume shipments to the US is not expected to be substantial, as the group can reduce its fleet size, and the profitability for automotive volumes in certain trade lines is very low (e.g. Atlantic trade). On the other hand, the indirect effects of slower global economic growth, combined with reduced deep-sea volumes across all cargo segments (not only US automotive imports), will not only directly impact the results, but could also lead to continued and increased overcapacity, and create further pressure on rates.
The geographical pattern of the production of automotive and high & heavy equipment is continuously changing. A shift in the balance between locally produced and exported cargo may affect the overall demand for deep-sea ocean transportation, resulting in changed utilisation of the fleet. A shift in customers’ market positions can also represent opportunities and risks for Wallenius Wilhelmsen’s operating entities. However, the group’s broad global coverage and client exposure reduces this risk element.
The main operational risks for Wallenius Wilhelmsen include tonnage balance, trade imbalance, vessel incidents, and adverse weather conditions. Wallenius Wilhelmsen strives to ensure sufficient fleet flexibility by combining owned tonnage with both long- and short-term charters. The owned tonnage and long-term charters represent the core fleet, while the short-term charters enable the operating entities to scale up and down capacity to meet changes in demand cost-effectively. Wallenius Wilhelmsen proactively handles trade imbalances through vessel swaps and space charter arrangements for excess volumes with other operators.
Furthermore, implementation of the IMO 2020 0.5% global sulphur cap represents a challenge and risk for the shipping industry, with fuel costs potentially to increase significantly due to lack of availability and quality of fuels. Wallenius Wilhelmsen is relatively well-covered through Sulphur (BAF) clauses already in place for the majority of the larger customer contracts and aims to introduce relevant clauses for remaining customer contracts. To handle this uncertainty, Wallenius Wilhelmsen has chosen a balanced approach which gives the best chance of managing risks and costs. The group has therefore arrived at a strategy of combining operating with different types of low sulphur fuel and installing scrubbers on the most suitable vessels.
Regulatory risk / anti-trust investigation
The operating entities WW Ocean and EUKOR have been part of anti-trust investigations in several jurisdictions since 2012. Wallenius Wilhelmsen expects the proceedings with the outstanding jurisdictions to be largely resolved in the first half of 2019, while the timeline for the resolution of civil claims is more uncertain. The ongoing investigations of WW Ocean and EUKOR are confidential, and Wallenius Wilhelmsen is therefore not able to provide more detailed comments.
The Wallenius Wilhelmsen group maintains a strong focus on compliance, and performs regular trainings and updates to its employees.
Environmental and safety risk
Wallenius Wilhelmsen is, by the nature of its activities, exposed to environmental and safety risks arising from both its ocean and land-based operations. These risks are mitigated through their respective management systems on all owned vessels and facilities. The management systems include a sharp focus on training, routines and measures designed to ensure continuous compliance with environmental and safety regulation. Environmental and safety risks associated with equipment failure or human error are minimised through frequent emergency response drills. Furthermore, the group has also implemented programmes with KPI follow-up that seek to identify and prevent potential environmental and safety risks.
Changes in regulation concerning emission of Green House Gases (GHG) are another significant risk factor for Wallenius Wilhelmsen. In April 2018, the International Maritime Organization (IMO), the shipping industry’s global regulator, agreed ambitious GHG reduction targets for 2030 and 2050. The regulations are expected to take shape over the coming few years and are likely to impact the shipping industry. Wallenius Wilhelmsen seeks to contribute to progressive yet pragmatic outcomes through active engagement in the regulatory process.
For further information, please refer to the sustainability section of the Directors’ Report.