Change strategy and management organization of Shipping Company as respond to severe market conditions

Table 4 - the Far East - the European complete situation

Complete of reduction were preparation for rather necessary rate increase (discussion see later). Demurrages and order cancellations were not the unique tools used by shipping lines to reduce ability. Many courts continue to slow down steam within 19 knots, despite cheaper prices of bunker fuel as longer time there and back helps to absorb redundant ability in the market (more courts necessary for service of the liner), supporting a port call frequency. Line Maersk and the Great Union - examples of shipping lines, choosing more and more a route of Cape round Southern Africa instead of a route of Suez canal, mainly on The going east foot of a trip there and back. The Cape route has longer times of transit, but shipping lines can avoid thus high payments of losses on Suez canal (this reach almost 700 000 USD for the greatest courts - one way) which are difficult the given economic climate and there are in the direct answer to cheap fuel of the bunker and bad sea transportations on returning Asian routes. For service EU3 of the Great Union (8 000 TEU each) the changing route round Cape of Kind Hope takes 10 courts additional seven days on transit. At Maersk was 15 services broken through Suez canal, but in the beginning 2009 six services (half of total volume) have been changed a route through Cape. One of these services was loop AE7 which develops the greatest vessels in its fleet.

Secondly, shipping lines should adapt the strategy of an estimation. In environment of surplus of capacities, the high fixed costs and a product perishability, lines pursue containers of filling of the contribution of a short space of time in a marginal cost, only come nearer, often leading to direct operational losses on branches which consider. Norm erosion would not be the problem large part if changes in the cargo prices have made main impact on demand. Unfortunately, for the majority of shipping freight the income, only makes very small part of an overall cost of shipping but as carriers cannot influence the size of the final market, they will try to increase the share in the market of a short space of time, reducing the prices. Also, shipping lines can reduce freight rates, essentially without mentioning the basic request on the container freight.

Drama development in the bunker cost, one of main working costs for shipping lines was one of the primary factors of influence mentioning recent strategy of an estimation of shipping lines. First half 2008 saw abrupt increase in expenses of the bunker, with the heavy fuel reaching of a maximum within 700 USD for ton in July 2008, in comparison with approximately 200 USD in January 2007 (Figure 4).

Figure 4 - Fluctuation of the bunker Price for grade IFO380 in Rotterdam (USD for ton)

The sudden increase in the prices of bunker fuel has brought up working costs of shipping lines and has induced them to bring up bunker and price surtaxes. With increase of a request surtaxes and rises in price were not any grandiose enterprise in the beginning but when the international economic growth became weaker, surpluses of capacities and decrease the in great demand lowered prices resolutely. Decrease in rates of economic growth places strong descending pressure upon the fuel price, with bunkers in Rotterdam sharply falling from 700 USD for ton in from July 2008 to 171 USD during time by the end of December. While it has made positive impact on vessel working costs, shipping lines have soon understood that filling of their courts became extremely difficult with the freight rates which any more are not making enough income to cover the operational expenditure. Some shipping lines kept extra charges on fuel cost is artificial highly for a while to make some income from container business. But in the beginning of 2009 lines have started to indicate all-in prices without delay which split ocean rates from currency, the bunker and limiting surtaxes of processing.

As rates slid, carriers have started to include additional payments which were imposed separately. Practically, it meant that freight rates of the container of a stain have been reduced to actually zero, with only small indemnification for surtaxes. Rates have reached a hurdle rate in February/March as they could not go much lower (Table 5). In the second quarter 2009 complete reductions of a vessel on main trading lanes have started to have positive influence on rates. In April 2009, has started to charge 250 USD more for TEU from Asia to Europe. Line Maersk has increased the rates for all consignment in Asia to the European trade (for example, +USD 250 for port TEU/main, effective on April, 1st 2009 and +USD 300 for port TEU/main, effective on July, 1st 2009). Also CMA CGM has carried out strategy of restoration of norm on its main branches for 2nd quarters 2009 (moving on the West: + 350 USD for TEU, going east: + 100 USD for TEU). Increases - a signal that the navigable industry of the liner slowly adapted to volume regulators.

Table 5 - the Basic freight rate and a payment for refuelling of a vessel by fuel (BAF) for the maritime transport of one forty foot container (FEU) from Shanghai to Antwerp

Thirdly, crisis also influences a market organisation. While there was no activity of major M&A in liner shipping between October 2008 and April 2009, the wave of acquisitions and company amalgamations seems inevitable intermediate term if recession proceeds in 2010. Consolidation process could allow to disappear to smaller cargo lines. Line Maersk, the greatest container line in the world, declared in the beginning 2009 that it did not have any plans to judge and purchase smaller competitors while crisis lasts. CMA CGM and Maersk, however, adjust the new agreement on vessel division across Asia-European to trade. Maersk has joined to CMA CGM as the supplier of a vessel on the French Asian Line (FAL) service. It can be considered as a step to complete consolidation on trade. Rather interesting should notice that some shipping lines still go strong enough, especially those with global illumination of services, such as MSC and CMA CGM. It seems that volumes on other routes, such as the South America and Africa help these lines to supply lead position in the Asian navigable market.

Reaction has the navigable industry time regulation, or whether really it is the beginning of change of a paradigm in the industry?

First of all, the made regulators are historical in proportions: never have many courts, taken out service, or have shipping lines, has redesigned their networks of service of the liner even if some experts believe that shipping lines have not gone far enough to battle to a situation. Slowing down has consequences on the size of a vessel. It is very improbable that shipping lines will place new orders for very big courts while crisis lasts.

There is also a general belief that the market will not see increase in the maximum size within next five years (at least). Emma Meersk's class and the comparable sizes of vessel MSC (compare Beatrice MSC approximately 14000 TEU) as thus expect, will generate a limit up of fluctuation at a rate of a vessel for coming years. Crisis also has convinced shipping lines to rationalise services and to flow the cascade the big vessels downstream to secondary trading routes. Many small courts are reserved, as they have lower fixed costs and consequently rather lower losses from non-operation. This practice had strong descending effect on charter rates for smaller units.

Secondly, some actions which, at first sight, have a temporality, could have long-term effects on shipping. It especially takes place for repeated opening of a route of Cape, should a combination of high payments of Suez canal, low factors of loading of a vessel and the high insurance fees caused by problems of a piracy about Somalia. The international changes in cargo streams (for example, strong growth of streams between the South America and the Far East and Africa and the Far East) united with active strategy of port of the centre of Southern Africa (Ngqura in particular see Notteboom, 2009b), Mauritius and other distances strong possibility of ports in Africa of Area of Sahara to lift more visible role in navigable networks of the world. Crisis certainly promotes this appearing opportunity for ports of Africa. In the environment to longer term a route the east - the West through Suez canal could even face to effective competition from the Cape route.

Thirdly, cancellation of conferences of the liner since October 2008 has led to interesting competitive game concerning complete expansion. Some shipping lines see crisis as possibility to receive a share in the market. MSC, the second-large ocean carrier in the world, meets a lack in the field of the leader of the market Line Maersk, fast expanding its fleet during sharp recession in container shipping while its competitors reduce the ability. According to Alphaliner, the share in market MSC in complete world container ability of a crack (excepting empty vessels) has raised from 10.4 % in the beginning 2008 to 11.5 percent on April, 1st 2009. During the same period Line Maersk saw the reduction of a share in the market from 16.1 % to 14.1 % and CMA CGM from 7.6 % to 7.1 %. While many ocean carriers dispossessed the works being in vessels and returned charter vessels when they come off employment, MSC added ability chartering courts for percent from the bargain. In September of the period 2009 Since April, 2008th, MSC, chartered dozen vessels 2 500 - 6 000 abilities TEU for between 12 months both 24 months and established other 10 courts during shorter periods. This deviating strategy, apparently, pays off. MSC it seems not mentioned recession and receives its big new buildings in the list. Such strategy clearly illustrate shortage of solidarity and coordination among shipping lines when business reaches complete expansion. Shipping lines which deprived ability of work to help to evaluate restoration, notice now that some shipping lines follow for some other way and benefit from a situation to increase their market power. It potentially leads to a trigger point where the shipping lines could undermine fragile process of restoration of norm, wishing to reverse their strategy in attempt to follow example MSC. Complete management thus, appears, very difficult problem in the narrowed markets as line which decide to reduce ability, could see other shipping lines 'a free trip' on received restoration of norm.

Fourthly, crisis - good possibility of shipping lines to make thorough survey of their business models. Shipping lines are convinced to deal with a current situation in branches, in a rational and patient manner with confidence to make business decisions based on long-term complete strategy, to reach viable operation of business of the liner, to support requirement of global trade. Rate and a choice of time of restoration of economy will be the important factor to shipping lines. Carriers cannot assume simply that market conditions will come back to ' normal ' as soon as the consumer confidence recovers, excessive stocks are wiped, and the postponed investments are made. Based on discussion in section 1, it is obvious that any way to restoration should consult with structural business factors, such as requirement for cover of the accumulated debt, or paying in it or through default of payment, and effect of higher unemployment on consumption patterns. The way of slow restoration would allow shipping lines to develop repeatedly resources and the equipment step by step, without destabilizing the market and rates. However, abrupt restoration would seize all unawares and will place strong pressure upon doing an idle capacity accessible on the market during the short period of time. Such fast development to a high request could lead to a situation (infrastructural) complete restrictions, soaring rates and the high fuel prices. Therefore, the navigable industry not only should find the decision to connect a current situation, but should develop also corresponding strategy to cope with various potential scenarios. The big companies, also it is probable, will expand the control of the market to overestimate vertical integration strategy in a chain, and to accept cracks and terminals from smaller competitors.

V. Approach for market strategy of Precious Shipping P.C.L.

The company of PSL characteristic

strategy management market condition

Precious Shipping P.C.L. ("PSL"), established in 1989 and listed on the Stock Exchange of Thailand in 1993, owns and charters dry bulk ships, on a tramp shipping basis, in the small, handy size sector of the shipping markets. The corporate structure of PSL, similar to other shipping companies, has separate subsidiaries owning each vessel to limit liability.

PSL on 31 January 2010 operates 23 bulkers and a cement carrier (the "Fleet"), representing 596,998 dwt. Of the entire Fleet, 23 ships are registered under the Thai flag, and 1 under Bahamas flag. PSL's corporate structure is represented in Appendix 2.

PSL is one of the largest pure dry cargo ship-owning companies operating in the small handy size (10,000 to 30,000 dwt) sector of the tramp freight market. This segment is extremely fragmented and characterized by companies owning 2 or 3 ships. PSL's Fleet makes it one of the largest, if not the single largest company in the world, operating in this segment. The Company has also entered into the Supramax sector by ordering 3 Ships each in years 2007 and 2008 for delivery in 2011 and 2012. PSL's Fleet is technically managed by Great Circle Shipping Agency Ltd, Bangkok, a wholly owned subsidiary of PSL that is ISO 9001 certified and is also now ISO 14001 certified which makes one of the very few Ship Management Companies which are compliant with this Environment Management System certification.

The Chartering of ships is mainly undertaken by PSL vide the following two options:

1) Time Charter: Under this Charter, the Charterer pays Charter Hire to PSL to operate the vessel for an agreed time period. The Charterer bears all voyage costs including the cost of bunker fuels. It may be noted in this case that PSL (or the Shipowning Company) is not the Lessor of the Ship but is a service-provider since PSL retains full control with physical and legal possession of the Ship remaining with PSL.

2) Voyage Charter: Under this Charter, the Charterer pays freight to PSL to transport a particular cargo between two or more designated ports. In this case, PSL bears all the voyage costs including the cost of bunker fuels.

PSL's Fleet does not follow set voyage routes, but each ship keeps moving across the globe depending on its charters. The Fleet is hired on both, time charters as well as voyage charters, with typical voyage duration of 1-3 months. The mix between the two types of business has historically been equal, until the year 2004 when this changed to an extent that almost all the ships were on time charters. In each of the years 2005-2006, the proportion of voyage charters increased marginally as compared to the year 2004. However during 2007-08 the equation changed again and about 99% of the journeys were time charters and only about 1% were voyage charters. During Year 2009, the proportion of voyage charters increased marginally as compared to years 2007-08 and about 94% of the journeys were time charters and only about 6% were voyage charters.

The well spread diversification and nature of its operations (dry bulk shipping in the small handy size sector carrying 'essential' basic commodities! enables PSL to minimise the impact of concentration risks in terms of regions or commodities covered, and economic cycles.

PSL's fleet as compared to the world average is younger, with present average age of about 17 years. PSL's revenues are well diversified in terms of its business mix as can be seen from table 6 and figure 5:

Table 6 - PSL's business mix

Figure 5 - PSL's Voyages

The following table presents certain information concerning the carriers in PSL's fleet, as of January 1, 2010

Table 6 - Fleet list

The annual net profit/loss from the Restated US Dollar Financial Statements over the past few years is represented in table 7.

Table 7 - The annual net profit/loss of PSL

Result for 2009 must be viewed against the US Dollar 11 Billion losses racked up by twenty two players (16 publicly listed and 6 private) in the Container Sector in just nine months of 2009 with only marginally smaller losses being shown by players in the Tanker and Dry Bulk sectors.

The Company's ships achieved an average time-charter equivalent earnings of USD 13,459 per day per ship as compared to USD 16,489 per day per ship for year 2008. The total revenues excluding gains on sales of vessels and equipment in absolute terms were lower than that of the previous year, mainly due to a decrease in ship operating days due to the sale and delivery of 20 older ships from the fleet and lower average earnings per day per ship in year 2009 as compared to year 2008. Absolute ship operating expenses, also decreased by about 11%. due to the lower ship operating days during the year. The technical downtime was an average of 10.18 days per ship, which is very good considering the average age of the fleet of about 18 years in 2009.

Financial performance

The following table summarises the performance of the Company for the last 2 years.

Table 8 - Financial performance of PSL

Also financial performance of PSL is represented in Figure 6.

Figure 6 - Financial performance of PSL

Total revenues have decreased from USD 258.60 million in 2008 to USD 184.95 million (including gain on sale of Ships USD 22.87 million) in 2009. The net ship operating income has decreased from USD 254.87 million in 2008 to USD 153.50 million in 2009. This is mainly due to the decrease in average ship earnings per day per ship (TC Rate) in 2009 as compared to 2008 and also because of the lower number of vessels operated during the year, due to the sale of the older vessels of the fleet. The lower average daily earnings could be attributed to the fact that some vessels whose long term charters expired during the year had to be chartered at prevailing rates which were lower than that prevailing when the Charters were fixed. The average number of ships operated were 33 during 2009 as compared to 44 during 2008. Consequently, operating cash flows or Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA) have decreased from USD 167.10 million in 2008 to USD 86.04 million in 2009. The average earnings per day per ship have decreased from USD 16,489 in 2008 to USD 13,459 in 2009 while average vessel daily ship running expenses (Орех) have increased from USD 4,804 in 2008 to USD 5,040 in 2009. As a result of the above, gross profit for 2009 was lower as compared to 2008.

Although average daily ship operating expenses have increased, it remained far below the industry's average.

Depreciation has decreased from USD 15.02 million in 2008 to USD 14.23 million in 2009 due to the reduction in average number of ships cperated during 2009 as compared to 2008 as a result of the sale and delivery of 20 ships in 2009. Finance cost has increased from USD 3.86 million in 2008 to USD 7.69 million in 2009. It is to be noted that the finance costs for this period mainly comprises of fees paid on new loan facilities availed during 2009, the commitment fees paid for maintaining the secured debt facilities during 2009, and deferred expenses written off for the reduction in loan amounts from the second-hand ship acquisition facilities and Interest on loans drawn for newbuilding orders have been capitalized.

Due to the appreciation of the Thai Baht against the US Dollar, the exchange rate (THB/USD) at the end of 2009 was lower as compared to the previous year. As a result of the translation of the Thai Baht denominated net current assets into U.S. Dollars, at the lower rate, there was an exchange gain of USD 0.16 million in 2009,

With decrease in gross margins per ship and decrease in ship operating days, operating profit has decreased to USD 64.12 million as compared to USD 148.22 million in 2008.

ncome Tax has increased from USD 0.64 million in 2008 to USD 1.30 million in 2009, which comprises of Income Tax provision of USD 1.25 million made on the "pre-delivery hire" received from customers for delivering the Ship before the contracted delivery date.

As a result of the above factors, the Company's Net Profit decreased from USD 148.14 million in 2008 to USD 88.09 million in 2009.

¦ Investments

During the year 2008, the Company's subsidiary signed an agreement on 30th December 2008 for buying 4.92 million shares of International Seaports (Haldia) Pvt Ltd at INR 110.46 million. The Company hopes to complete this transaction in year 2010 and with this additional investment, the Company's final stake in this joint venture will increase to 33.55 percent.

During the year 2006, the Company invested in 2,026,086 ordinary shares of par value of Baht 10 each, in TMN Company Limited, registered in Thailand (TMN) of which Baht 5 per share is paid-up, which works out to USD 0.26 million. The Company has not made any further investment in TMN in year 2009.

¦ Current Assets

As compared to the end of the previous year (2008), there is an increase of USD 77.41 million in the current assets as at 31st December, 2009, mainly due to higher Cash and cash equivalents. With no repayments of any loan during 2009, the Company has accumulated excess cash generated from operations. This cash balance was after paying dividends of USD 60.36 million during the year 2009. Receivables, net of all provisions, which are part of current assets decreased marginally by USD 0.08 million as compared to the previous year. In any case, as is customary in the shipping business, the Company actually collects almost all its income in advance (95% of Freight in case of a Voyage Charter and 15 days' Hire in case of Time Charter) and as such, there is no concern on collection of receivables and consequently, the amount presented as receivables is only on account of miscellaneous dues from Agents, Charterers and accrual of income on the basis of percentage of voyage completed.

¦ Fixed Assets

The value of fixed assets of the Company has decreased from previous year's levels mainly on account of sale and delivery of 20 ships and depreciation provided during year 2009. As at 31st December 2009, the Company owned 25 ships (24 existing vessels plus one vessel bought in October and delivered in December 2009), details of which have been provided in the Fleet List separately in this Report. The Company signed Memorandum of Agreements for sale of 21 ships out of which, 20 ships were delivered to the buyers in year 2009 and 1 ship is delivered in 2010.

The details of Ship Sales in 2009 have been given in 3.4 above.

¦ Advance for construction of New Ships

The Company has entered into 12 Shipbuilding contracts for 12 handysize bulk carriers of size 32,000 DWT and 6 Shipbuilding contracts for 6 supramax bulk carriers of size 54,000 DWT with ABG Shipyard Limited, India during years 2007-2008. As on 31st December 2009, the Company has paid installments of USD 224.80 million as explained in note 3 above.

¦ Total Liabilities

The Company's secured debt balance is USD 128.08 million as at the end of year 2009, on account of Bank loans of USD 107.20 million against newbuilding loan facility explained above, for paying to ABG Shipyard Limited (Builder) towards second and third installment of 10 Ships ordered as explained in note 3 above. The Company has also drawn Thai Baht 734.27 million for buying Ship Rosella as explained in 3.3 above. The Company swapped the Principal amount of Baht 734.27 Million to USD 22.15 Million per hedging facility as explained in 6.3 above. Deferred financial fees of USD 1.27 million is presented as deduction from Secured loan basis proportionate amount of drawdown made so far from this facility. Consequently, the total liabilities have increased from USD 50.82 million in 2008 to USD 149.13 million in 2009

¦ Shareholders Equity

Due to the net profits of USD 88.09 million earned during the year, dividends of USD 60.36 million (Baht 2.00 per share) paid during 2009, and net increase of USD 4.16 million on account of Revaluation surplus, translation adjustment and minority interest, the Shareholders' Equity is now at USD 495.44 million, which is an increase of USD 31.89 million over the Shareholders' Equity as compared to the end of the previous year. As a result of the above increase in Shareholder's Equity as explained above, the net book value per share has increased from USD 0.45 per share as at the end of 2008 to USD 0.48 per share as at the end of 2009.

Leverage, Liquidity and Coverage

The Company's credit risk profile has consistently improved since the debt restructure of year 2000. As the Company's EBITDA remained at respectable levels during 2009 and the Company had USD 128.08 million outstanding secured debt at the end of the year, the leverage ratios remain very strong. As at 31st December 2009, the Company's funded debt level is 1.49 times its EBITDA. The Company's overall gearing (Total Liabilities/Tangible Networth) is at 0.30 times as at 31st December 2009, which has increased from 0.11 times as at 31st December 2008, due to increase in secured debt as explained above.

The Company's debt serice cover for 2009 was 11.19. The ratio of EBITDA/lnterest has improved considerably since year 2000 and it is now 11.19 times as of 31st December 2009. Both these ratios show the Company's strong ability to service the existing debt or conversely its capacity to draw more debt for fleet rejuvenation.

Risk facrors in company's activity

PSL has classified the various risk factors the Company is exposed to into three categories viz. Operating Risk, Financial Risk and Market Risk. In recognition of the Financial Crisis triggered in year 2008 and the consequent collapse in the Dry Bulk Shipping Market, the Company additionally identified and categorized in the previous year, a special risk associated with maintaining and expanding capacity, which has been classified as "Capacity Replacement and Expansion Risk". This is retained in the current year as the Company continues to be exposed to this risk as explained hereunder. Further, for this year also, the Company remains exposed to the significant risk factors arising out of the Global Financial Crisis which are classified hereunder as "Effect of Global Financial Crisis". The significant risk factors under each of these categories are explained as under:

Operating risk

The Company, as an owner and operator of ocean-going vessels operating without any geographical limitations is exposed to risks of marine disaster, environmental mishaps resulting in substantial claims, cargo/property loss or damage and business interruptions due to accidents or other events caused by mechanical failure, human error, political action in various countries, labor strikes, terrorist actions, piracy, adverse weather conditions and other such circumstances and events. This could result in increased costs or loss of revenues. However, to cover against most of these risks, which are standard for an International Ship owner/Operator, insurance covers are available in the international insurance industry. Accordingly, the Company is adequately covered against such aforesaid circumstances and events.

The operations of the Company depend on extensive and changing environment protection laws and other maritime regulations, non-compliance with which may entail the risk of detention of ships leading to loss of time which would lead to loss of revenues or claims from charterers, significant expenses including expenses for ship modifications and changes in operating procedures. However, the Company is vigilant on these issues and maintains internationally prescribed safety and technical standards.

The operations of the ships and the management of the Company as a public company listed on the Stock Exchange of Thailand require skilled personnel to be employed as crew to operate its ships and managers at the corporate level with appropriate knowledge and experience. Sourcing and retaining such personnel is crucial for the business operations of the Company. However, due to the adoption of fair and reasonable staffing policies, the Company has hitherto been quite successful in sourcing and retaining such highly skilled and qualified personnel and the Company continues to take a number of initiatives to attract and retain talent, and therefore does not expect any future cause for serious concern in this regard, although International Shipping has recently emerged out of a tremendous shortage of qualified crew, particularly in the officers' cadre, required on board the ships.

As a publicly listed company, PSL is required to comply with various laws and regulations and failure to comply with any one or more of such laws and/or regulations could expose the Company to penalties or other legal action against the Company and its senior management. The Company remains vigilant on this issue and has taken adequate steps to employ qualified staff and also adopted adequate and effective systems to ensure full compliance with all laws and regulations.

The Company is not exposed to any risk of increased costs due to an increase in international oil prices, since, whenever the fuel costs are on the Company's account (in case of a Voyage Charter), increase in oil price is passed on to the Customers since the freight rates are quoted and charged after incorporating the increased fuel cost. In case the business is done on a Time Charter, the fuel cost is on the Customer's account.

Financial risk

Almost the entire Revenues and Expenses of the Company are denominated in US Dollars. Further, almost all the Fixed Assets of the Company, viz., ships are US Dollar based assets, since they are readily salable in US Dollars in the International market. Therefore, the Company is exposed to the risk of realising a Foreign Exchange loss in respect of its liabilities in any currency other than US Dollars. The US Dollar equivalent figure of such "Non-USD" denominated debt may increase or decrease with a fluctuation in the respective exchange rate. In recognition of this risk, the Company has attempted to maintain least possible exposure in other currencies and accordingly always maintained US Dollar denominated credit facilities and loans. As on 31st December 2009 the Company's loan for financing the new ships ordered by the Company is denominated in US Dollars only. However, due to the effect of the Global Financial Crisis and the inability of the Company's Local Lenders to extend the loan in US Dollars in the beginning of this year (2009), one of the Company's facilities originally denominated in US Dollars, was converted into Thai Baht when the availability period of the facility was extended by one year. However, in recognition of this risk, the Company has obtained commitment from the same Lenders to convert the Thai Baht liability into US Dollars through the use of a Swap whereby the principal portion of the Loan as and when drawn by the Company shall immediately be converted into US Dollars, thereby eliminating the Foreign Exchange risk associated with the loan principal. However, the interest on the loan is payable in Thai Baht and to that extent, the Company continues to be exposed to this risk. The Company is currently attempting to convert even the future Interest payable in Thai Baht into US Dollars.

The Company also maintains almost all its Bank balances in US Dollars whereby there is no risk of realising any loss on these balances, in US Dollar terms. However, it must be noted that the Company is exposed to an exchange loss in Thai Baht terms on translation of its US Dollar denominated Assets, Liabilities, Income and Expenses, arising out of the Currency translation from US Dollars to Thai Baht in the Thai Baht Financial Statements.

The Company's debt facilities carry interest at floating rates based on LIBOR (London Inter-Bank offered rate) and as such, the Company is exposed to fluctuations in its interest rates due to changes in the LIBOR. The Company monitors market interest rates regularly and remains vigilant on this issue.

The Company's Assets, i.e. ships, have a finite life and as and when the ships reach a certain age, they need to be sold for onward trading or scrapped. This leads to a decrease in capacity as it has happened this year when the Company has sold 21 ships out of its fleet of 44 ships at the beginning of the year and if the Company wants to maintain capacity in terms of fleet size, the Company has to continuously follow a program of replacement of its older scrapped (or sold) vessels. Purchase of ships requires considerable funding, which may be through equity or debt or both. If the Company is not able to raise the necessary funds required for the purchases of ships to maintain capacity, the Company's Capacity will continuously deplete, which is not desirable if the depletion is for a sustained period and as such, the Company is exposed to a funding risk. However, in recognition of this risk, the Company has not only ordered new ships and arranged credit facilities for the new ships, but also put in place credit facilities for acquisition of additional ships, which are available to the Company to purchase new (if delivered immediately) or second-hand vessels.

Market risk

The shipping industry and market has been cyclical, experiencing volatility in profitability, vessel values and freight rates, resulting from changes in the supply of and demand for shipping capacity, as explained in the section on "Nature of Business and Industry" of this Report. The Company had traditionally marketed all its ships in the spot market and had therefore been exposed to market fluctuations and the cyclical nature of the business. However, the Company believed that by being in the *niche* small handy size sector of the industry, wherein there is a fundamental advantage of demand over supply, some downside protection against the cyclical nature of the business was provided. Besides, traditional clients in this sector of the market did not take ships on long term contracts and preferred to do the majority or all their business only on the spot market. This situation has of course changed in the last 4 to 5 years because of the increase in freight market volatility leading to a change in strategy of the Company as well as that of clients where by can now fix a major portion of the Company's fleet on longer term charters, keeping the Company insulated somewhat from the volatility of the spot markets and ensuring stability in its revenue stream.

The demand side of the Company's business is generated by the quantity of cargo its vessels are required to transport. The generation of this demand is mainly dependent on World Trade and Economic Growth. Severe depression in Growth and Trade could reduce the demand for ships. The spurt in demand for dry bulk shipping capacity in the past 4/5 years has largely been driven by the demand from China (supplemented by India and countries in the Middle-East) which is importing commodities and raw materials in huge quantities for major infrastructure projects. If there is a significant reduction in the Demand from China on a sustained basis, particularly in the next few years when a significant number of new ships presently on order, are expected to enter the market, it could have an impact on the overall demand/supply balance in Shipping Capacity, which could lead to a significant fall in freight rates and could also be coupled with a fall in ship values. The Company had acquired a number of second hand ships at market values in 2004 while the market had been in the midst of this upturn, and therefore, the Company was exposed to the risk of reduced earnings and/or fall in asset values if there had been a significant downturn in the market. This did not happen and the Company was able to generate substantial revenues and extremely good returns on its acquisitions. Further, in December 2006Airst Quarter 2007, the Company has sold 10 of its oldest vessels in the fleet with an average age greater than 26 years, at attractive sales prices which could be said to have reduced the risk to a large extent as this risk is higher in respect of the older vessels. The Company has also sold 21 of its oldest vessels this year at reasonably attractive prices and has thereby avoided exposure of these older vessels to unemployment and/or very low rates in the spot market once their long term contracts had expired. In respect of revenues on the rest of the fleet, the Company has attempted to continued its strategy to mitigate this risk for its fleet by entering into period charters or contracts for a longer period for most of its ships, wherever possible, whereby the Company is able to "lock-in" future earnings at higher freight rates. As mentioned above, this was a significant change made in 2004 in the Company's strategy of doing business, whereby the Company had deviated from its traditional policy of trading on the spot market with Voyage Charters and/or Time Charters of very short durations. During the year 2007, the market continued to move significantly higher until it reached a peak in the middle of the year 2008, after which the Industry witnessed a sharp drop in market rates to levels close to all time lows. There has been a recovery in the dry bulk markets in this year from the second quarter but the situation remains uncertain and volatile, particularly because of the expected supply of new vessels. As expressed earlier, in the Company's opinion, given the uncertainty and the extreme volatility in the market where rates can shoot up or collapse very quickly, it is always prudent to "lock-in" the future earnings, at reasonably high freight rates whenever possible, as a cushion against a sudden and, more particularly, a sustained collapse of the freight rates in the spot market which is what PSL witnessed since July 2008 through Q1 2009 before the onset of a slight recovery due to the resumption of commodity imports by China as a consequence of the Fiscal Stimulus introduced by the government in China. This strategy had been vindicated in the past when the spot freight markets witnessed a fall after early 2005 but the Company's earnings outperformed the market during the year and in the market circumstances of the second half of the last year and the beginning of this year, this strategy has proved to be a winner beyond all doubts as a cushion against wild swings in revenues.

However, the above strategy exposes the Company to the counterparty risk of its Customers whereby, pursuant to a fall in the market and consequest fall in freight rates, the Company's customers (Charterers) with whom the period charters have been signed could default on their obligations, as a result of which, the Company will not be able to achieve the higher contracted freight rates and would then be forced to contract these ships in the spot market in a depressed market when market freight rates would be lower. However, the Company is always conscious of the counterparty risk associated with its period charters and accordingly takes steps in analysing the counterparty risk of its potential charterers, particularly those with whom the Company signs longer period charters, and such contracts (Charters) are signed only with first class charterers with the highest possible credit ratings. It is for this reason that right through the depressed market upto the end of Q1 2009, the Company did not suffer any significant losses on account of defaults by Charterers.

The Company's ships ply in international waters all over the world and the employment of its vessels is quite evenly distributed, without any concentration in any particular area. As such, the Company is not exposed to a risk of geographical concentration of the Company's market and its customers. Therefore, any major adverse change in the market conditions in any one particular area of the world due to war, political action, or any other reason shall not result in a significant drop in revenues.

Capability replacement and expancion risk

As explained above, the Company's Assets, i.e. ships, have a finite life and as and when the ships reach a certain age, they need to be scrapped. This leads to a decrease in capacity and if the Company wants to maintain capacity in terms of fleet size, the Company has to continuously follow a program of replacement of its older scrapped (or sold) vessels. In the current year (2009) the Company has sold 21 of its oldest vessels thereby reducing its Fleet size substantially. If the Company wishes to maintain capacity, a replacement of the sold ships have to be undertaken. Replacement of scrapped/sold ships could be achieved by purchase of second-hand ships from the open "Sale & Purchase" market. However, due to the boom in the International Shipping market in the past 4/5 years, the values (cost) of second-hand vessels were at unprecedented highs and the Company did not deem it prudent to be buying ships at these values and expose itself to the risks of an impairment charge on its assets as a result of the fall in the market values of ships in case of a sustained downturn that appeared to have been triggered in the latter half of the previous year but turned around somewhat this year as explained hereinabove. While the Company has managed to purchase one second-hand ship in the end of this year, if the ship values do not fall appreciably or in fact increase, although the Company wishes to replace all its scrapped/sold old ships with younger and bigger ships, the Company may not be able to buy enough second-hand (or new ships for immediate delivery) ships and the inability to buy reasonably priced ships exposes the Company to the risk that the Company has not, and may not for a sustained period of time, replace its capacity as a result of the sale/scrapping of the Company's very old ships.

The Company has attempted to mitigate the above Capacity Replacement risk, by entering into contracts for construction of new ships (newbuildings) at reasonable prices and specifications matching the Company's requirement and needs. This would ensure capacity replacement/expansion as and when the ships are delivered in accordance with the contracts. While the Operating and Market risks associated with the ships as and when delivered have been discussed above, the specific risks associated with the newbuilding contracts are summarized as under:

¦ Risks associated with the Ship Builder: The Company is exposed to a default risk by the Ship Builder in terms of adhering to delivery schedules and/or achieving the right quality of the ships whereby the ships may not be delivered for any reason or delivery of the ships is delayed and/or the ships delivered are not of the expected and contracted quality. The Company has attempted to mitigate these risks by carefully evaluating the capacity of the Ship Builder in terms of meeting contracted delivery schedules and maintaining quality and has obtained bank guarantees to cover refund of pre-delivery installments and/or delay in deliveries apart from including stringent penalties in the contracts, both, for delays as well as departure from specified quality parameters. Further, the Company has also appointed and deployed a team of highly qualified and experienced marine personnel to supervise the construction of the ships at the shipyard.

¦ Risks associated with the Cyclical Industry: The Company is exposed to the risk that when the newbuildings (particularly the larger Supramax vessels where the demand-supply outlook appears less favorable than in the smaller handysize vessels) are delivered or soon after acquiring a number of secondhand ships, the Shipping Market goes into a cyclical downturn and at such time, apart from a fall in the ship values, it may not be possible to charter out these ships at the expected rates. In order to mitigate this risk, the Company is attempting to book forward time charters at reasonably high rates, based on the expected delivery dates of the newbuildings and intends to book 2/3 years charters for second-hand ships immediately after they are bought and delivered.

Further, if the newbuildings are delivered while the industry is in the midst of a cyclical downturn, the market values of the new ships may drop to levels at which the Company may default under the "Loan to Value" Covenant required to be maintained in accordance with the Loan facility Agreement. The Company is mindful of this risk and in order to mitigate this risk, apart from ensuring adequate cash reserves in the Company (to partially prepay the Debt), the Debt for the new ships is secured for only 15 out of the 18 new ships ordered by the Company which may allow the Company to provide these 3 unencumbered new ships as additional security for the Debt after they are delivered.

¦ Risks associated with funding: The Company was exposed to the risk that the funding required for the newbuildings could not be tied up through external sources in which case, the Company would have been forced to utilize internal operating cashflows for this purpose, which, may not have left sufficient or any excess cash for dividends or other capital expenditure. In order to mitigate this risk, the Company tied up credit facilities to fund 15 out of the 18 newbuilding contracts entered into by the Company in the previous year. Further, the Company also has other credit facilities available to fund the second-hand ships to replace the old vessels sold by the Company.

Effect of the Global Financial Crisis

The most significant risk factors arising as a direct effect of the Global Financial Crisis on the Shipping Industry and consequently on the Company, are summarised as under:

¦ Demand Loss Risk: The financial crisis led to a closure or downsizing of a number of businesses and business units all over the world coupled with reduced access to Trade Finance, thereby affecting World Trade and resulting in a loss in demand for shipping services and consequent collapse in freight rates. Although there has been a small recovery in demand as explained hereinabove, the Company's strategy of signing longer term charters for the Company's ships at reasonably high rates, somewhat cushioned the Company's revenues from the effects of this sudden and appreciably large fall in Freight rates. However, although there has been a recovery in demand, it is not certain whether this could be sustainable and whether the magnitude of the recovery will be able to compensate for the expected increase in supply of new ships. Therefore, in such case, if there is a sustained fall in the market, the Company's revenues may be significantly affected because the Company shall be forced to charter those ships which are not chartered on long periods or those of which have expired, at very low rates on a sustained basis and/or may be forced to scrap its ships which are not very old because of the absence of demand for such ships or because of its inability to charter these ships at their respective break-even rates which would at least allow the recovery of the respective operating expenses of such ships.