KEY FIGURES. Million Business volume * 17,618 19,027 21,974 Ship finance business. Equity capital. Profit and loss account

Transcription

1 ANNUAL REPORT 2010

2 KEY FIGURES Million Business volume * 17,618 19,027 21,974 Ship finance business New loans 1,674 2,007 4,928 (US-$ equivalent in million) (2,237) (2,891) (7,210) Loans outstanding as at ,797 11,636 11,992 (US-$ equivalent in million) (15,763) (16,763) (16,681) Commitments as at ,775 2,470 4,611 (US-$ equivalent in million) (2,372) (3,558) (6,420) Equity capital Subscribed capital + reserves g HGB reserve Participation rights / Subordinated liabilities Profit and loss account Net interest and commission income Administrative expenses Operating profit - before risk provisions after risk provisions Taxes on income (- = revenue) Net profit / loss Amount transferred to earnings reserves Dividend per share (face-value 520) Cost / income ratio 16.1 % 19.4 % 14.7 % Return on equity before taxes before risk provisions 19.8 % 23.0 % 33.7 % after risk provisions 0.6 % 4.1 % 0.3 % Rating Moody's A3/P-2/D ** A2/P-1/D A2/P-1/C+ * total assets + guarantees + commitments ** since

3 ANNUAL REPORT 2010

4 CONTENTS Senior Management 2 Supervisory Board 4 Trustees 4 Advisory Board 5 REPORT OF THE BOARD OF MANAGING DIRECTORS 6 Overview 8 World Merchant Fleet 10 Individual Markets 14 Shipbuilding 24 Business Report 26 REPORT OF THE SUPERVISORY BOARD 44 SHIP PROFILES 48 ANNUAL STATEMENT OF ACCOUNTS 64 Balance Sheet as at 31 December Profit and Loss Account 68 Statement of Shareholders Equity 69 Cash Flow Statement 70 Appendix to the Annual Statement of Accounts 71 ATTESTATION OF THE LEGAL REPRESENTATIVES 90 AUDITOR S REPORT 91 Figures in brackets refer to the preceding year.

5 SENIOR MANAGEMENT Werner Weimann Member of the Board of Managing Directors (Chairman) Werner Weimann joined Deutsche Schiffsbank in December 2008 as a member of the Board of Managing Directors. He is Speaker of the Board of Managing Directors, responsible for domestic markets, management support and staff matters. He joined the Commerzbank group in 1976 and after several stages in Germany and abroad he took responsibility for the bank s branches in Bremen and Hamburg. Thereafter, he was promoted to Regional Managing Director North, in charge of business clients in the North, which included the Renewable Energies and Global Shipping Centre of Competence. Dr. Rainer Jakubowski Member of the Board of Managing Directors Dr. Rainer Jakubowski has been member of the Board of Managing Directors of Deutsche Schiffsbank since May As Chief Risk Officer, he is responsible for risk management and compliance. He started his career at Deutsche Bank in 1986 with stints in Cologne, Munich, Frankfurt, London and New York, at the end with emphasis on international loan business, before joining Dresdner Bank in Frankfurt in 2005, where he was head of risk management, overseeing domestic small and medium sized companies and international corporate clients, including ship finance and country risk. Tobias Müller Member of the Board of Managing Directors Tobias Müller joined Deutsche Schiffsbank in 1998, and has been a member of the Board of Managing Directors since He is in charge of finance, IT/organisation, operations and internal audit. Before joining Deutsche Schiffsbank he was a partner in the predecessor organisation of pwc as auditor and tax consultant, where, as a member of the management, he was responsible for financial service companies. Dr. Stefan Otto Member of the Board of Managing Directors Dr. Stefan Otto left Commerzbank s Mittelstandsbank and joined Deutsche Schiffsbank in October He is a member of the Board of Managing Directors since April 2011and is overall head of the foreign markets, capital markets, treasury and business development, as well as debt, capital markets & transaction management. One central role is the integration of the shipping activities of Commerzbank and Deutsche Schiffsbank. After various periods at home and abroad as an employee of Dresdner Kleinwort Wasserstein in New York, Dr. Otto took over several leading functions in Dresdner Corporate and Investment Bank. At the Mittelstandsbank, he became head of the business development division. 2

6 Stefan Kuch General Manager International Loans Stefan Kuch has been a member of the senior management of Deutsche Schiffsbank since October He is responsible for the international client relationship management. He started his career in the Export Department of Commerzbank in 1985, later switching to ship finance. In 2002 he became head of the Shipping Centre of Competence at Commerzbank, responsible for international loan business. Jeremy Scott General Manager Treasury Jeremy Scott joined Deutsche Schiffsbank in April 2005, when he took up responsibility for the bank s treasury activities. Previously he was at Bankgesellschaft Berlin for ten years, where he led the derivative sales and structured products functions. His initial banking experience was gained during a ten year period at Dresdner Bank, where he was responsible, among other things, for international derivative sales. Dr. Jan Rolin General Manager Business Development and Debt Capital Markets & Transaction Management Dr. Jan Rolin, a barrister and solicitor, joined the management of Deutsche Schiffsbank in July He is in charge of the business development and debt capital markets & transactions management. He started off in 2005 in risk management, followed by a stint in Dresdner Bank corporate banking. In 2007 he was head of ship finance at the Dresdner Kleinwort investment bank. 3

7 SUPERVISORY BOARD Jochen Klösges Chairman Member of the Board of Managing Directors Commerzbank AG, Frankfurt /Main Lutz Diederichs Member of the Board of Managing Directors UniCredit Bank AG, München Klaus Müller-Gebel Deputy Chairman Solicitor, Frankfurt /Main Irmgard von der Fecht Bank employee Deutsche Schiffsbank AG, Hamburg Dr. Thomas Bley Member of the Board of Managing Directors EUROHYPO AG, Eschborn Ute Köster Bank employee Deutsche Schiffsbank AG, Bremen TRUSTEES Ulrich Keller Senior Civil Servant (retired) Bremen Wilfried Laugwitz Deputy Senior Civil Servant Hamburg Dr. Thomas Brinkmann Deputy Solicitor and Notary Bremen Dr. Horst-Michael Pelikahn Deputy Senior Civil Servant Hamburg 4

8 ADVISORY BOARD Klaus Müller-Gebel Chairman Solicitor, Frankfurt/Main Lutz Diederichs Deputy Chairman Vorstandsmitglied UniCredit Bank AG, München Dr. Hans Christoph Atzpodien Member of the Board of Managing Directors Thyssen Krupp Marine Systems AG, München Jürgen Bentlage Bremen C. Andreas Bunnemann Managing Partner Herm. Dauelsberg GmbH & Co. KG, Bremen Jochen Döhle Managing Partner Peter Döhle Schiffahrts-KG, Hamburg Hermann Ebel Member of the Board of Managing Directors and Partner Hansa Treuhand Schiffsbeteiligungs GmbH & Co. KG, Hamburg Sven-Michael Edye Member of the Board of Managing Directors Sloman Neptun Schiffahrts-Aktiengesellschaft, Bremen Shaun Harbinson Vice Chairman CONTI Group, Hamburg Alfred Hartmann Chairman of Supervisory Board Hartmann AG, Leer Stefan Jüngerhans Managing Director Jüngerhans Maritime Service GmbH & Co. KG, Haren/Ems Dr. Hermann Klein Member of the Supervisory Board Germanischer Lloyd SE, Hamburg Dr. Bernd Kortüm Managing Partner Norddeutsche Vermögen Holding GmbH & Co. KG, Hamburg Frank Leonhardt Managing Partner Leonhardt & Blumberg Reederei GmbH & Co. KG, Hamburg Robert Lorenz-Meyer Managing Partner Ernst Russ GmbH & Co. KG, Hamburg Thorsten Mackenthun Managing Director Hanseatic Lloyd Reederei GmbH & Co. KG, Bremen Dr. Klaus Meves Hamburg Bernard Meyer Managing Partner MEYER WERFT GmbH, Papenburg Claus-Peter Offen Managing Partner Reederei Claus-Peter Offen GmbH & Co. KG, Hamburg Dr. Eberhart von Rantzau Managing Director Deutsche Afrika-Linien GmbH & Co. KG, Hamburg Johann-Stefan Reith Managing Director Orion Bulkers GmbH & Co. KG, Hamburg Erck Rickmers Managing Partner E. R. Capital Holding GmbH & Cie. KG, Hamburg Dietrich Scheder-Bieschin Managing Director MACS Maritime Carrier Shipping GmbH & Co., Hamburg Dr. Axel Schroeder Managing Partner MPC Münchmeyer Petersen & Co. GmbH (MPC Holding), Hamburg Jan-Wilhelm Schuchmann Managing Director Bugsier-, Reederei- und Bergungs-Gesellschaft mbh & Co. KG, Hamburg Nikolaus H. Schües Shipowner Reederei F. Laeisz Schiffahrtsgesellschaft mbh + Co. KG, Hamburg Christiane Scola Shipowner Reederei Nord Klaus E Oldendorff GmbH, Hamburg Niels Stolberg Partner BELUGA SHIPPING GmbH, Bremen Nicholas Teller Managing Partner E. R. Capital Holding GmbH & Cie. KG, Hamburg Harald Winter Managing Partner Walther Möller & Co. (GmbH & Co) / Reederei Gebr. Winter GmbH & Co. KG, Hamburg Dr. Henning Winter Neumünster 5

9 REPORT OF THE BOARD OF MANAGING DIRECTORS

10 OVERVIEW The recovery of the world economy from the crash caused by the financial and economic crises was surprisingly strong. Financial markets have stabilised, although the sovereign debt crises of some European countries early in 2010 required a rescue package in order to maintain financial stability. Supported by numerous fiscal and monetary interventions, the world economy grew strongly during the first six months, but lost some momentum during the second half of the year and only picked up speed again towards the end of The recovery of the world economy was primarily fed by dynamic emerging Asian countries, with China taking the lead. Stock increases, rising consumer spending and asset investments in industrial nations by the private sector caused a hike in global production and trade volumes. Strong expansion, improved consumer sentiment and investments in Asia fuelled demand for imports in this region. The importance of Asia for the global economy and for ocean transport demand was increasing. Beneficiaries were the economies of the USA and the euro zone, in the form of higher exports. The ongoing recovery of the world economy in the year under review had a positive effect on all shipping segments. The container trade has recovered to a large extent. Trade and charter rates throughout all sizes benefitted heavily from rising demand. Firm time charter rates for larger vessels are an indication that the market outlook is positive. The ongoing economic recovery should, in our opinion, be a firm basis for continuous trade growth. After two years of restrained ordering, numerous newbuilding contracts for post- Panama vessels (above 4,500 teu), with delivery dates beween 2012 and 2014, reflect liner companies belief in recovering container markets and rising cargo volumes. Towards the end of 2010, demand for bulk carriers and tankers was noticeably down. Tanker markets are influenced by a number of factors which are difficult to forecast and can change market balance significantly. In view of an order-book-to fleet-ratio of more than 30 % in some tanker segments, and only a few older vessels, fleet growth is set to be higher than in In addition, the number of vessels used for storage purposes is down, seriously disrupting the market balance, which will be hard to correct. Bulk carrier markets recovered in 2010, but lost momentum towards the end of the year. Strong fleet growth, which is set to continue for the next 24 months, and adverse weather conditions were responsible for deteriorating charter rates. Due to strong investment activity and the ongoing industrialisation of emerging countries, we expect rising yet volatile markets. Rates will remain low in 2011, but they should at least stay above break-even levels. High fleet growth and supply bottlenecks in exporting countries will pose employment risks and put pressure on rates. Against the background of the IMF forecast for a 4.4 % rise in the global economy, primarily supported by Asian emerging countries, ocean transport and cargo volumes are set to increase, but with newbuildings affecting markets and few scrapping candidates, the actual recovery potential depends to a large extent on how the global economy develops. Although the situation in money and capital markets improved only marginally Deutsche Schiffsbank managed to stabilise its strong market position with total loans (including commitments) of 13.6 billion. Deutsche Schiffsbank is one of the leading banks in maritime finance worldwide and combines the traditional strengths of Deutsche Schiffsbank, Commerzbank and the former Dresdner Bank. The 8

11 loan portfolio is spread more or less evenly among different customer groups, vessel types and countries. Due to the uncertainties surrounding the financial markets and because the seaborne trade is only slowly recuperating, Deutsche Schiffsbank like other ship finance banks was selective in its new loan business in the year under review. The bank s activities, especially during the first half of the year, were basically limited to drawdowns under existing loan commitments and necessary restructuring of existing exposure. New loans were granted primarily to Greek and Asian owners. Our loan portfolio, to a large extent denominated in US dollars, rose by 0.2 billion to 11.8 billion in 2010, almost entirely due to a stronger US dollar. Contractual repayments and extraordinary loan reduc - tions were considerably higher than our loan advances, surpassing drawdowns by 796 million. Loan advances were about 17 % lower than the previous year, totaling 1.7 billion, consisting primarily of drawdowns of existing commitments for newbuildings or restructuring of existing exposures. Loan commitments were down by 0.7 billion to 1.8 billion. Broken down by ship types, our portfolio is still split almost evenly between the three standard vessel types container ( 4 billion), tanker ( 3 billion) and bulker ( 3 billion). The remaining exposure consists of specialised tonnage and is highly diversified. Our determined strategy to reduce the risks of our existing loan portfolio resulted in increased stability in Our interest surplus in 2010 was notably higher than the year before, totaling 175 (150) million. The rise was due to an inflated volume of ship loans, as a result of the US dollar exchange rate, higher margins, and lower funding costs. Net commissions rose sharply to 16.0 (9.7) million. Administrative expenses stood nearly unchanged at 29.3 (29.5) million. Our operating result before risk provisions stood at 163 (133) million. Due to the ongoing pressure on freight rates and vessel values in some market segments, a relatively large part of our shipping loans is at risk. As a consequence, additional funds were allocated to individual risk provisions. The bank determinedly pursued the measures to secure liquidity requirements in 2010 initiated during the previous year. We therefore managed to further stabilise and strengthen our financial resources, in spite of the ongoing uncertainty in the financial sector. In all these efforts cooperation with Commerzbank remains all-important. Markets for bonds issued by public bodies deteriorated in 2010, due to higher spreads. In relation to our total portfolio, write-downs were substantial, almost entirely relating to PIIGS states. We have reduced our business with these states in Our bond portfolio contains only paper issued by banks and public bodies, predominantly EU states. At the end March 2011, Commerzbank AG announced its intention to integrate Deutsche Schiffsbank. The merger into Commerzbank AG is to take place prior to the year-end. Shipfinancing will become a core business for Commerzbank AG. After the successful reorganisation of Deutsche Schiffsbank in the past two years, this merger underlines Commerzbank s long-term commitment to its ship finance business. This will give us and our customers the stability which is essential for a long-term and trusting business relationship. 9

12 WORLD MERCHANT FLEET The world merchant fleet grew by close to 10 %, to 1.35 billion dwt, in the year under review. Although fleet growth was strong, the fleet registered for delivery in 2010 indicated much higher fleet growth at the start of the year. In the bulk, tank and container sector, less than two -thirds of the capacity registered for delivery in 2010 actually entered the market. Nevertheless, the bulk carrier fleet and the offshore support and container vessel fleet rose strongly (bulk by as much as %). The bulker fleet expansion had already started in 2009, when the fleet grew by 10 %. The bulk carrier fleet expanded to 535 million dwt in 2010, from 459 million dwt the year before, and the fleet now counts 8,154 vessels above 10,000 dwt. The capesize fleet alone grew by a massive 23 % in 2010, following 19 % growth in and come in close to the registered order book level of 1.65 million TEU at the turn of the year. Tanker markets will have to cope with a substantial influx of newbuildings in 2011, with the registered tanker order book for 2011 delivery representing as much as 14 % of the existing fleet. However, deliveries are expected to continue to be significantly lower than the registered order book. Demolition is not expected to reduce fleet growth significantly, as the tanker fleet in most segments is modern and the phase -out of single -hull tankers in general is finished. Newbuilding deliveries were higher than in any previous year. At the same time, 13 million dwt were sold for demolition, this primarily being the demolition of tankers faced with the deadline for the phasing out of single-hull tonnage. Due to the scrapping and postponement of delivery dates, the container fleet did not increase by 2.2 million TEU as indicated by the order book at the start of the year, but only by 1.4 million TEU or 9.2 %. Given the positive development in the container market, deliveries are expected to pick up further in 2011 The demolition of container vessels remained relatively high, at close to 130,000 TEU, but the demolition of bulkers only reached 6 million dwt as the charter market remained generally healthy during most of the year. The strengthening of steel prices observed during 2009 was maintained throughout 2010 and Source: Own calculations, based on Clarkson Research Ltd., London Age structure / Order books in % of existing tonnage 150 Crude oil / Product tankers 1 Bulk carriers 2 Container ships 3 Overall Order book 0-4 years 5-9 years years years 20 years and older

13 scrap prices offered high values for the vessels sold for demolition. The capacity of scrapped vessels was slightly down from the record year of 2009, but more than 800 vessels with a total capacity of 25.9 million dwt went to the scrapyard, primarily in Bangladesh, India, Pakistan and China. With the exception of smaller Handysize tankers, both the tanker and container fleets, are characterised by modern fleets and limited scrapping potential over the next few years. Relative to the fleet size, the proportion of old tonnage was reduced in most segments during 2010, both as a consequence of demolition, but also due to growing fleets. By the end of 2010, 6 % of the container fleet, 6 % of the tanker fleet and 22 % of bulk carriers were aged 20 years or more. In various areas of specialised shipping, the proportion is higher. Due to the economic downturn in 2009, transport demand decreased in most segments, resulting in excess tonnage supply. The economic recovery in 2010 led to sharply increased trade volumes and the idle container fleet as a share of the total fleet was, according to Alphaliner, reduced from close to 12 % at the start of 2010 to less than 3 % by the end of the year. The employment situation varied in the various size segments, with the larger vessels close to full employment during the first months of the year and the smaller vessels gradually being brought into the market throughout the year. It was not until the fourth quarter of 2010 that all segments had less than 5 % of the fleet idle. In addition to the trade recovery, slow steaming of container vessels continued to increase liner companies capacity requirements. The use of tankers as floating storage facilities tied up tonnage, in particular in the larger vessel classes during the first half of the year. Expectations of increasing oil prices motivated traders to put oil on tankers and wait to sell that oil at higher prices at a later point in time. The market expectations of increasing oil prices were significantly reduced during the year, which explains why the use of tankers for storage purposes was significantly down. Whereas more than 5% of the tanker fleet was used for temporary floating storage early in 2010, this share had fallen to around 1.5 % by the end of the year. The tankers released to the market put significant pressure on rates during the second half of the year. Contracting activity increased again during 2010, and in particular new orders for large container ships were placed during the second half of 2010, after close to two years of absence of fresh orders in this segment. Bulk carriers counting for more than 50 % of the total contracting volume. Newbuilding prices were slightly up during 2010, as forward order books with the yards were relatively comfortable and increasing steel prices led to additional inflationary pressures. Continued interest in ordering large container vessels was seen up to the end of the year as the charter markets remained strong. As market perspectives improved in several segments during 2010, owners investment activities in the sale and purchase markets gained momentum. In total, 66 (55) million dwt worth US $ 23 (16) billion changed hands in 2010, which illustrates the positive development in ship values. Second-hand prices for tankers were relatively stable, while bulk carrier prices were up some 5%. Container ship values had a strong recovery on the back of improved charter rates, and market values more than doubled over the year in some segments. Second-hand sales in the container market more than doubled in terms of capacity changing hands. Tanker volumes were also higher in 2010, but the number of second-hand transactions for bulk carriers was slightly down from

14 In 2010, Japan was the leading maritime nation, with a share of 15 % measured by GRT and owner nationality. Greece came second with 13%, ahead of Germany with 9 %. The Chinese merchant fleet follows with 8 %. With a share of 35 % of container capacity, German shipping companies and limited partnership companies are the undisputed leaders in this segment. They continued to expand their total merchant fleet in 2010 to a total transport capacity of more than 100 million dwt. The shipping and financial crises have had a noticeable impact on investment activity and the market for venture capital in limited partnership companies in Germany. The broadly diversified order backlog of German owners consisted of 724 units. With a market share of around 9 % and a contract value of US $ 35 billion, German companies make up the third largest investor group in the world, after Greece (41) and China (36). Due to the lack of demand from investors, investment houses only managed to sell shares in limited partnership companies amounting to 1.0 (0.7) billion. Many owners and limited partnership companies had to restructure in order to be competitive in future. Apart from more equity, joint commitment from shareholders, banks and owners was needed. The German maritime industry faces another difficult year. Greek shipping companies, whose presence in the tanker and bulk carrier markets is traditionally strong, continued to take an opportunistic approach in 2010 with newbuilding contracts amounting to close to US $12 billion, which was only matched by Chinese owners with a similar amount invested in newbuildings. Because it has become more difficult to borrow money and in view of relatively large order books for the bulker and tanker segments, the contracting of new tonnage is still well below the boom years of 2007 and 2008 when Greece committed US $ 38 billion and US $17 billion respectively to newbuildings. Nevertheless, Greek owners are still actively expanding their business. Second-hand prices Source : Own calculations, based on Clarkson Research Ltd., London million USD Age of the vessels: 5 years Tanker: VLCC Bulk carrier: Panamax Container ship: 1,700 TEU geared I II III IV

15 More than 10% of the global order book measured in dollar terms is for the account of Greek shipping companies. In 2010, Chinese-backed finance was more prominent in the Greek market, trying to forge ties with Greek owners interested in building ships in China. Greek shipping companies continue to be active buyers of second-hand tonnage and place orders for newbuildings. A number of Greek buyers entered the container ship market, both through second-hand investments and the ordering of newbuildings. Supported by state funds and a strategic increase in market share, Chinese owners remained active buyers of second-hand tonnage, but Greek owners returned to the top spot, with the highest number of vessels bought. The capacity of the Norwegian merchant fleet decreased somewhat to 40 (42) million dwt in the year under review. It was a mixed year for the Norwegian shipping industry, with bulker earnings healthy, but some of the tanker owners faced difficulties with very low charter rates for smaller tankers. Norwegian shipping companies are traditionally strong in offshore and industrial shipping, i.e. the integration of specific tonnage into the supply chain. Although a niche market like car carriers developed positively, with a significant reduction in inactive vessels and improved charter rates during the year, earnings remained at low levels in well as on the ship owning side, both of which are interested in further investments in newbuildings as well as second-hand tonnage. The slide in bulk carrier earnings towards the end of the year resulted in an increased focus on counterparty risk, as a number of charterers had vessels on charter at considerably higher rates than in the spot market. A substantial share of the orders which were registered for delivery in 2010 did not come to the market and the future of a number of registered contracts still remains uncertain. Asian banks reentered international ship financing, whilst the top banks in China became major lenders to their domestic shipowners. The Chinese government s stimulus measures were shown to be effective with shipbuilding as one of the industries included in China s revitalisation plan, benefiting to the point of seeing the mainland s shipyards overtaking South Korea to make China the world s largest shipbuilding nation for newbuilding orders. Meanwhile, the mainland steel manufacturers continue to work with major Chinese shipowners to control the transportation costs of iron ore by fixing vessels on long-term contracts. The market for offshore supply vessels remained weak. The Macondo accident in April 2010 put a temporary hold on activity for the deepwater drilling rigs, but rates were relatively stable at healthy levels. A number of new orders were imminent towards the end of the year as oil prices remained high and large investment programmes in deepwater offshore oil fields were lined up. The Norwegian shipping community strengthened during 2010, both on the bank and finance side as 13

16 INDIVIDUAL MARKETS The global economy developed much more strongly than expected in 2010, and the container sector in particular benefited from higher trade volumes than initially expected for the year. Container freight rates were substantially higher than in the crisis year of 2009 and charter rates recovered gradually during 2010, with larger vessels leading the recovery. A gradual recovery was seen in smaller vessels. Fleet growth in the container sector was relatively low (9 %) due to scrapping and postponement of newbuilding contracts. Reduced service speeds further contributed to the container market recovery. The tanker markets had a weak year despite relatively strong growth in world oil demand and oil trade. In particular the second half of the year turned out to be disappointing as floating storage was reduced, putting pressure on the larger tankers, whereas the product tanker segment continued at low levels. Although average earnings for the year were generally above break -even levels, the year ended on a soft note as bad weather reduced exports from a number of exporters and high fleet growth put rates under additional pressure. In particular the Capesize segment saw earnings sharply reduced towards the year-end. Bunker costs were relatively high in 2010 and prices increased further in the last months of the year. The use of slow steaming was seen in the container sector, but several tanker operators were also slow steaming their vessels to reduce bunker costs in a low -charter rate environment. Bulkers were generally not optimising speed in this way as potential savings were relatively small compared with charter rates during most of the year. The dry bulk trade increased strongly thanks to continued strong demand for iron ore, and a boost in seaborne coal trades as China and India entered the market. Ordering activity for bulkers picked up considerably in However, fleet growth was also high and large fluctuations in Chinese import demand led to a volatile year for earnings. 14

17 CONTAINER VESSELS The first fresh orders for post-panamax container vessels were placed in the summer of 2010, ending almost two years of absence of orders in this segment. US container imports in 2010 were up a massive 16 % compared to 2009, based on healthy levels of private investments and stronger consumer spending. Growth in Asia-Europe container traffic was as high as 18 % in 2010, partly based on pickup effects from the recession in Sharply higher volumes within Asia and from Asia to the Middle East, Africa and South America were also observed. The container fleet ended the year with close to 5,000 ships with an aggregate carrying capacity of 14.1 million TEU. The container fleet expanded by 9 % in 2010 and, due to few new orders during the year, the order book-to-fleet ratio came down from 36 % at the start of the year to 28 % at the year-end. The container order-book continues to lean heavily towards the larger-sized segments, which are expected to see continued strong growth in the years to come as ordering activity for large post-panamax vessels picked up considerably during the second half of Although scrapping remained relatively high 127,000 TEU went to the scrapyard demolitions slowed sharply during the year as the market improved. Scrapping potential within the fleet remains relatively low and is primarily limited to small and mediumsized vessels. Liner companies increased revenues dramatically in 2010, with higher trade volumes and freight rates which increased by 35 to 60 % from 2009 on major trade routes out of Asia. Approximately 12 % of the fleet was unemployed at the start of 2010, but as cargo volumes resumed and slow steaming continued to utilise capacity, only 2.5 % of the fleet was idle by the end of the year. The recovery which first started in larger vessels had reached all segments by the end of the year, although vessels below 1,000 TEU still had 4.5 % of the fleet idle. The ongoing recovery of the world economy should continue to have a positive effect on transport demand and market conditions in the current year. In view of the strong market recovery observed lately, the employment conditions and earnings in the charter market are set to continue to improve. Charter market container ships 1- year time charter Source: Own calculations, based on Clarkson Research Ltd., London USD/day 35,000 30,000 25,000 20,000 15,000 10,000 Modern tonnage Panamax (3,600 TEU) Handysize (1,700 TEU) Feedermax (800 TEU) I II III IV ,

18 MULTI-PURPOSE VESSELS The fleet consists of 3,000 vessels with a total deadweight capacity of 26.8 million dwt. The average age of a vessel was 15 years as at year-end. More than one third of the MPP fleet is equipped with a heavy- lifting capacity of more than 50 tonnes. The markets for modern multi-purpose tonnage were mixed in Container charter rates improved dramatically, but freight rates declined significantly during the fourth quarter as well, reducing earnings due to the necessity of relocating empty containers. Although there were reports of a recovery in High and Heavy cargo volumes, project cargoes with long lead times which helped to prop up the market during 2009 while other cargo volumes fell seemed to struggle in the year under review. A reduction in new projects during the financial crisis is likely to have caused a drop in project cargo volumes. Renewed investment activity is expected to increase project volumes in Deliveries were slightly up on 2009 at 145 units with a total of 2.0 million dwt. 1.1 million dwt of capacity was scrapped during 2010, and it is expected that there will a high level of scrapping activity in the coming years in light of the fact that a large proportion of the MPPs are more than 20 years old. The registered order book presently accounts for 27 % of the fleet, with more than half of the orders registered for delivery in

19 BULK CARRIERS Iron ore and coal the major commodities shipped by bulk carriers experienced strong demand growth in the reporting year, in particular from emerging markets such as China. Chinese policies to fight inflation and measures introduced in the second half of the year to reduce energy consumption have caused volatility in Chinese steel production and coal consumption, which in turn has caused demand for bulk transport to become equally volatile. Given the status of the steel and power industry on the political agenda in China, the bulker markets are likely to see continued volatility stemming from Chinese policy measures towards those industries over the next years. The bulker market was able to accommodate a massive fleet growth of 17 % in 2010 as bulk demand increased by a robust 10 %. Bulk carrier charter rates were volatile but generally well above break-even levels, even if the year did end on a soft note, particularly for the largest iron ore and coal transport vessels. Major exporters of iron ore and coal experienced heavy rain towards the end of 2010 and export levels were significantly down, a trend which has continued into Of particular note in 2010 was the strength of the smaller bulker segments for Panamax and Handymax vessels, in which rates increased by almost 30 % from 2009 levels as a result of strong transport demand for not only coal but also other bulk commodities, as well as the high volumes of iron ore. The values of bulk carriers, both newly-built and secondhand, were relatively stable during the year, with a five-year-old capesize valued slightly below USD 52 million at both the end of 2010 and the end of Bulk carrier demand is expected to maintain a strong growth pattern over the next years based on demand from emerging and developing markets. High fleet growth is, however, expected to put pressure on the market balance and average bulker rates are expected to weaken somewhat compared with 2010 rates. Dry bulk freight rates 1- year time charter Source: Own calculations, based on Clarkson Research Ltd., London USD/day 120,000 Modern tonnage Capesize Panamax Handymax I II III IV , ,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,

20 CRUDE OIL AND PRODUCT TANKERS 2010 continued the trend seen in 2009, with the larger crude tankers seeing average rates close to break-even levels while product carriers struggled to meet capital costs as rates in particular for the smaller vessels approached operating costs on a number of occasions. Tanker rates in 2010 benefited from modest fleet growth of 3.9 % as deliveries of newly-built ships were offset to some extent by the removal of old, single-hulled tankers. The VLCC fleet increased by just 2.5 % as single-hulled VLCCs were removed from the fleet and deliveries were lower than in the product tanker segment. The registered order-book-to -fleet ratio for the overall tanker fleet at the end of 2010 was 28 %, but the capacity on order leaned heavily towards the larger vessels. The registered VLCC order book at the end of 2010 represented 36 % of the existing fleet, and although fleet growth for the product tanker segment is expected to slow in 2011, the VLCC fleet is expected to see significant growth over the next two years. Scrapping of tanker tonnage was up to 12.7 million dwt in 2010, but removals of tanker tonnage from the fleet in the form of conversions to offshore projects or bulk tonnage was almost equally important amounting to nearly 9 million dwt. A few single-hulled tankers remain in the tanker fleet, although only a limited number of them are still actively trading. With an average age of 8 years, the tanker fleet is more modern, only 6 % of the tanker fleet is 20 years old or more, and it is only the smaller segments below 30,000 dwt that have a significant proportion of older vessels. The use of tankers for the temporary floating storage of oil was an important factor in the VLCC segment in 2010, with a reported proportion of close to 9 % of the VLCC fleet being used for this purpose during the spring. Floating storage came down significantly during the third quarter of the year and accounted for less than 2 % of the total tanker fleet at the end of the year. Tanker freight rates 1-year time charter Source: Own calculations, based on Clarkson Research Ltd., London USD/day 70,000 60,000 50,000 40,000 30,000 Modern tonnage VLCC Suezmax Aframax Product (Handymax ) I II III IV ,000 10,

21 CHEMICAL TANKERS Charter rates for many chemical tankers dropped below breakeven rates in the second quarter of 2009 and have stayed below breakeven ever since. Market rates in 2010 were often not covering much more than operating costs and interest payments. A number of these tankers have a large share of their employment in European waters with earnings particularly dependent on European oil demand which saw demand hard hit by the recession and seems to be continuing its decline. At the year-end, the active fleet consisted of 46 million dwt, with registered orders of 10 million dwt, i.e. somewhat more than twenty per cent of the existing fleet. Until the fourth quarter 2008, the chemical tanker market was a market which had been developing positively for years, with strong trade growth in cargoes transported, liquid chemicals and oil products. The chemical tanker market furthermore benefitted from higher IMO safety regulations enacted in 2007, which stipulated that vegetable oils and fats needed to be transported in IMO II tankers, and from growing global use of biofuels. The continued order backlog reflects the positive sentiment which existed before the financial crisis. Fresh orders have been close to non-existent in 2009 and 2010 following very weak markets and charter rates often quoted at OPEX levels. The fleet grew by almost 7 % in 2010, or by 2.8 million dwt, although delivery dates were postponed and newbuilding contracts cancelled. Scrapping was high in 2010, and as markets still have to improve, further scrapping is expected. 19

22 GAS TANKERS by the end of the year, after a very weak summer when several vessels were idle. Only modest fleet growth is expected in 2011, as only eleven vessels are due to be delivered. A healthy increase is predicted on the demand side. The age profile of the LNG fleet is very young. More than 50 % of the vessels were delivered after The influx of new LNG (liquefied natural gas) tankers continued, irrespective of the delays in the start-up of LNG production facilities (of which LPG is a byproduct), which gave rise to their orders. Transport volumes of LNG increased by 20 % or 215 million tonnes. This is the highest increase in volume since the early 1980s. A negative factor for demand in 2010 was storage. The 9 % increase in demand due to storage in 2009 was reversed and had an eqivalent negative effect in Last year, 24 new large LNG carriers were delivered from shipyards and one small vessel was sold for scrap. This resulted in a 9% capacity growth rate in Although a positive trend in charter rates for LPG carriers was seen during the year in particular in the second half of the year average rates remained low. The overall fleet increased by 3.3 % to 19.4 million cubic metres in Utilisation of the LNG carrier fleet rose in the second half of the year as new projects came on stream, lifting charter rates above US $ 60,000 a day 20

23 OFFSHORE half of the year. No modern deepwater drilling rigs were cold stacked at the end of Higher oil prices, and an end to the post-macondo drilling ban with approval work for new permits started, led to improved market sentiment and renewed ordering activity towards the end of the year. Drilling rigs Oil prices continued to increase during 2010 after the recovery seen during from the low 40 ies early in the year to around 75 $/bbl towards the end of Brent oil ended 2010 above 90 $/bbl. After a more than 10 % drop in Exploration and Production spending in 2009, sustained higher oil prices led oil and gas companies to increase spending by around 11 % in As oil prices are expected to remain high, many oil companies are reporting further increases in E&P spending for The Macondo accident in April 2010 was however putting drilling activity on hold, in particular in the US Gulf of Mexico. The Macondo blow -out increased environmental concern in oil companies further and older rigs have become more difficult to employ. At the end of 2010 seventy-four jack-ups were unemployed with a large proportion in the US Gulf. Increased environmental concern and demand for premium assets have seen modern units with much better employment prospects than older ones. It remains to be seen how many of the older jack-ups will go back into operation, taking high costs for upgrading and classification into account. Supply vessels Demand for offshore supply vessels increased in 2010, but the market had still to absorb a high number of new deliveries. Charter rates for AHTS vessels in the North Sea remained low during 2010 with spot rates similar to 2009 levels. PSV spot rates improved significantly from 2009, although rates still were well below levels. A number of AHTS vessels were observed doing cargo runs (PSV work) as rates for this work were more attractive. A high number of newbuilding deliveries reflect the high ordering before the financial crisis. The fleet of rig supply vessels and anchor-handling tugs increased by almost 300 units to 5,191 vessels during the year. Nevertheless, the share of old vessels with low specifications and capacity remains high. At the year-end, the order backlog stands at roughly 450 vessels. Increasing global offshore activity is expected to gradually lead to a more balanced market for offshore support vessels. The drive in demand from new drilling rigs for deepwater activities tends to favour PSVs as most of these rigs are dynamically positioned. Day rates for deepwater units continued to slide during the first half of 2010 but kept up surprisingly well given the post Macondo ban on deepwater drilling. Rates for Deepwater units were down around 15 % in 2010, after a similar decrease in 2009, but rates were stable during the second 21

24 CAR CARRIERS FERRIES After the boom years 2007 and 2008, where tonnage demand could not be satisfied at times, global car sales and the seaborne movement of cars fell significantly in the wake of the economic crisis. More than 50 car carriers were idle at times in Car carrier operators responded by sending close to 20% of the fleet to scrapyards over the last two years. The economic recovery in 2010 resulted in higher car sales and demand for car carriers improved during the year. Stronger car sales were seen in all major regions except Western Europe, as incentive schemes there ran out. The main exporters, Japan and Korea, increased volumes by more than 30 % in 2010 and by the end of 2010 only a few older units were still idle. Charter rates improved correspondingly, although they were still below historical levels by the end of the year. With less than 100 vessels registered in the order books, the order-book-to -fleet ratio has come down to below 20 %. Continued recovery in global car sales is expected, along with limited fleet growth in 2011 and The ro-ro sector has seen modest growth in recent years, while investment has focused on the pure car carrier fleet. However, the onset of the global downturn saw trade volumes drop dramatically and in response, investment in ro-ro ships halted while demolition activity soared. Investment remained weak in Meanwhile, with the current fleet being relatively old, a large proportion may still be sold for scrap, which could result in some replacement demand in the future. The ro-ro fleet is typically divided into four main vessel types and the fleet, although relatively old, offers unusual flexibility, being able to carry diverse cargoes and serve ports that could otherwise be difficult to access for more conventional vessels, particularly fully cellular container ships. The average age of a ro-ro vessel stands at a not particularly youthful 21.3 years, and 55 % of the fleet is more than 20 years of age. 22

25 CRUISE VESSELS Due to the diversity of the ro-ro fleet, analysis is complex. At the start of September 2010, it comprised 1,014 vessels of 9.35 million dwt. These vessels can be categorised as follows: 133 ro-ro/freight/passenger vessels with an average size of 6,659 dwt and an average age of 19.6 years. 183 ro -ro/lo-lo vessels averaging 7,540 dwt and 22.6 years of age. 580 full ro -ros with an average age of 22 years and an average lane length of 1,593 m. 109 ro-ro/container vessels. These ships average 22,649 dwt and 19.3 years of age. They have an average lane length of 2,871 m. The order book comprised 81 vessels totalling 1.07 million dwt equal to 11.5 % of current fleet capacity. The ro-ro order book is currently very biased towards the larger end of the sector, with 81% of capacity on order for vessels of 10,000 dwt and above. The cruise market continues to grow. As at the yearend, the fleet stood at 441 vessels with a capacity of 471,621 lower berths. In 2010, 19 vessels were delivered. Global passenger numbers increased on average by 6.6 % in the last ten years. 65 % of the 20 million passengers worldwide are from North America and 28 % are from Europe. Turnover increased by 7 % in 2010 and is expected to grow again in Six vessels were scrapped and three were converted. Carnival has ordered ten vessels that will be delivered from Italian and German yards by The leading shipyard groups are STX, Meyer and Fincantieri. The two largest cruise operators are Carnival and Royal Caribbean Cruise Lines, with a market share of 46 % and 22 % respectively. Bookings for high-end cabins and luxury cruises continue to rise. For the major cruise operators, operating results were satisfactory in 2010 and the outlook for 2011 is positive. 23

26 SHIPBUILDING During 2010, contracting of new tonnage was significantly higher compared to the low activity seen in the aftermath of the financial crisis. Healthy earnings for tankers during the first half of the year gave shipowners an incentive to invest in new tonnage. Although the number of new contracts was modest during the first quarter, activity picked up in the second and third quarters. Towards the end of the year, contracting activity dropped along with freight rates. Shipbuilding prices continued a downward trend until the end of the first quarter of Prices started to climb in the second quarter, based on higher demand. Prices softened somewhat again towards the end of the year, as demand from the bulker sector was down. Whereas South Korea is the largest builder of tanker tonnage, China has the dominant position in the bulker order book. Chinese yards turned out the largest volume of ships measured in dwt in 2010, ahead of Korea and Japan in second and third place. Japanese shipowners dominate their country s order books. In China, more than a third of new orders came from domestic accounts, while Korean shipowners account for less than 10 % of orders at Korean yards. The demand for new tonnage was driven by healthy earnings in the freight markets. The relatively low price level compared with 2008 could also be another factor driving demand. More than US $70 billion was committed to new vessels in 2010, sharply up from

27 Deliveries Source: Own calculations, based on Clarkson Research Ltd., London million cgt 50 Others China South Korea Japan EU New Orders 2010 (cgt) Overall 33.8 million cgt Source: Own calculations, based on Clarkson Research Ltd., London 35 % South Korea Japan 6 % Others 8% EU 4% 47 % China Order book Source: Clarkson Research Ltd., London million cgt Others Container ships Bulk carriers Crude oil / Product tankers (incl. Chemical / Oil tankers)

28 BUSINESS REPORT SHIP FINANCE Although economic growth in the second half of 2010 was, over long stretches, somewhat less dynamic than in the first six months, the development in the world economy appears to be self-sustaining. Recent data suggests that consumer spending is increasing in industrial nations, and emerging countries are expanding strongly. Industrial production, financial investments, and commerce in China grew more strongly than anticipated in 2010, due to an abundance of cash and a vigorous economy. The ongoing recovery of the world economy in the year under review had a positive effect on the maritime industry. Rising stocks and asset investments by the private sector caused global production and trade volumes to increase significantly. Emerging countries are increasingly the backbone of ocean transport demand, with China at the forefront. The global economy grew by 5 per cent in 2010 and the IMF forecasts a rise of 4.4 per cent in Cargo volumes in the container trade increased during the year, and freight- and charter rates steadily recovered from 2009 levels, only slowing down towards the end of the year, so that liner companies managed to increase their earnings last year. Growing cargo volumes on the main shipping routes and slow steaming stimulated demand for larger vessels. Due to scrapping, cancellations and postponement of newbuilding contracts, the fleet grew only by 9.2 per cent in 2010, instead of 15 per cent as forecast. Charter rates for larger vessels were generally above break-even levels, those for smaller vessels still below. to floods and severe weather conditions in Australia and Brazil. The bulk carrier fleet grew by 16.5 per cent and the high order backlog (52 per cent) is expected to put pressure on the market balance in the next 12 to 24 months. Average charter rates for large crude oil tankers hovered around break-even levels in the year under review. Nine per cent of the VLCC fleet was used as floating storage facility for part of the time in spring 2010, going down to 3 per cent towards the year-end, which seriously disrupted the market balance. Product tankers were struggling to meet break-even requirements, and smaller units only just managed to cover operating costs. Overall, the tanker fleet increased by 3.9 per cent and strong fleet growth is expected in the next two years. Due to the uncertainties surrounding the financial markets and because the seaborne trade is only slowly recuperating, Deutsche Schiffsbank like other ship finance banks - was very selective in its new loan business in the year under review. The bank s activities, especially during the first half of the year, were basically limited to drawdowns under existing loan commitments and necessary restructuring of existing exposure. New loans were granted primarily Ship loan portfolio by country Greece 25 % 7 % 5 % East Asia 5 % Exposure at Default ( EaD) in billion Norway North America The bulker trades benefitted from higher demand for iron ore and coal, particularly in growth markets, spearheaded by China. As of the second quarter, transport demand became more volatile and towards the end of the year cargo volumes were down, due Germany 40 % 5% Great Britain 3.5 % Italy 9.5 % Others 26