In 2004 EBITDA was USD 31.0 million, up from USD 21.8 million in 2003, an increase of USD 9.2 million. Ordinary result before tax was USD 15.1 million compared to USD 6.5 million in 2003. The result was better than expected.

The result improvement was due to increased demand and higher rates, fleet strategy and positive developments in value-adding services ashore, including LauritzenCool Logistics.

The reefer market is seeing a change in the seasonality that is typical for the transport of perishable foodstuffs. During the off season months (July-December), many vessels are usually laid up but in 2004 virtually all functioning vessels were trading during this period. Demand was strong and market rates were considerably higher than before. The changed structure and the continuing consolidation among market players provide an interesting scene for the coming years.

Transport of perishable foodstuffs in containers is increasing and LauritzenCool is well equipped to provide this additional service to its customers on its fleet of specialized reefer vessels.

On 1 January 2004, LauritzenCool made a tonnage sharing agreement with NYK Reefers, a collaboration that will be developed further from January 2005 as the two companies agreed a memorandum of understanding with the intention of creating a 50:50 joint venture.

LauritzenCool Logistics (LCL) is continuing its expansion. The company, which focuses on providing door to door logistics solutions for the perishable industry, today operates from 15 different geographical locations. During 2004, new LCL offices and logistics operations were established in Ecuador, Netherlands and the UK. LCL Costa Rica and Uruguay also had their first operational year in 2004. Through its subsidiary in Brazil, LCL acquired an additional third shareholding in Brasreefer, thus increasing its holding to 66.67%.

Market Development

Average reefer spot rates during 2004 were remarkable, breaking record levels during the off season months. The annual average spot rate level for large modern tonnage was 64 cents per cbft (2003: 51/cbft), and 72 cents for small vessels (2003: 61/cbft). Using comparable figures from some of the main reefer brokers, one has to go back to 1992 to find similar annual rates.

The year started rather slowly, with many market players wondering whether or not the reefer peak season was going to really take off, recalling the strong peak season of 2003 which had generated a great deal of optimism for the coming year. The main reason behind the initially slow market movement in 2004 was very poor banana production in Ecuador, which led to an accumulation of idle vessels in that area. This trend was reversed as banana production increased, and after a worryingly slow start, the Argentine deciduous season quickly picked up speed. The Chilean fresh fruit export industry handled record volumes, with a clear inclination for cargoes to move towards Europe because of the strong Euro. Even though the peak season was not as distinct or as sustained as in 2003, trading conditions during the latter half of 2004 were so positive that rates ended at a considerably higher level than in 2003.
 

Market events that influenced reefer activities during the year included the avian flu crisis, which led to trade restrictions and changes of trading patterns, and tropical storms in the Caribbean which severely affected production of Florida citrus and bananas on some of the Caribbean islands.

Another noticeable event was the aggravation of the banana trade dispute between the EU and banana producing countries regarding EU’s banana imports. There were heated discussions on the tariff levels that will have to be resolved during 2005 for the new tariff-only system to come into place in January 2006.

As the EU welcomed ten new member countries on 1 May 2004, interim arrangements had to be made before the introduction of the tariff-only system, and these increased banana quotas to the EU by nearly half a million tons.

The distinctive feature of the reefer market in 2004 was the strength of the off season. There were many reasons behind this development, with several notable factors:

The supply situation. The past few years has seen a net reduction in the reefer fleet. There have been no new vessel orders while the trend toward scrapping has pointed upward, especially during 2004 when scrap prices were exceptionally high. 26 vessels are known to have been scrapped in 2004, mostly during the first half of the year. This reduced the reefer fleet by almost 9 million cbft.. The scarcity of vessels occurred at a time when demand was good, creating market equilibrium that put an upward pressure on freight rates.

The booming shipping market. Due to the intensity of world trade, especially the Pacific trade with China, all segments of shipping flourished during 2004. Lucrative opportunities attracted some reefer operators to ship dry cargo, taking some vessels off the reefer market. At the same time, the container lines were not so inclined to compete in the traditional south-north reefer trades due to the availability of other interesting cargo.

The general growth in fruit imports. Russia has appeared as a major growth market for fruit imports, especially for bananas and citrus from South Africa and Argentina, which are important trades during the off season months. While not increasing at the same speed as Russia, there is also a trend towards continuing growth in fruit imports in the more mature markets of Europe and the United States. Some of the reasons for this trend include a growing number of free trade agreements for agricultural products, increased consumption of exotic fruits, changing purchasing patterns of the large retail chains and aggressive marketing campaigns by the major Southern Hemisphere exporters.

At the end of 2004, positive market developments were reflected when period contracts were negotiated for 2005, with a general 15-20% increase as a result.



The fleet
During 2004, an average of 118 vessels between 180,000 and 760,000 cbft were employed by LauritzenCool and associated operations. The ships are employed in the Leonina system and in a tonnage sharing agreement with NYK Reefers. LauritzenCool also collaborated with Eastwind and Armada under the name of ReeferShip.

JL’s fleet included seven owned vessels and 16 chartered vessels. The average age of JL’s owned fleet was 13.9 years compared to 15.7 years for the world fleet in the segment above 350,000 cbft.

Ship management of JL’s own reefer fleet is undertaken by Lauritzen Fleet Management. All vessels are operated under the Danish flag and are registered in the Danish International Ship Register (DIS).

During the year three vessels experienced engine damage, and unexpected off-service rose to 1.7% of the ship days available, compared to 0.6% in 2003 and the target figure of less than 0.5.%.

Two unplanned dry-dockings were carried out in 2004.

Events after year-end
On 10 January 2005 a memorandum of understanding was agreed with NYK Reefers to create a 50:50 joint venture. Under the agreement, NYK will purchase 50% of LauritzenCool AB and LauritzenCool AB will take over NYK Reefers’ trading activities.

Apart from two bareboat charter arrangements entered into jointly during 2004, no vessels or vessel commitments form part of the deal.

Subsequently, LauritzenCool withdrew from the Reefer Ship partnership. As of 1 January 2005, Eastwind took over the full ownership of Arctic Reefers Ltd.

Three reefer vessels, Chilean Reefer, Peruvian Reefer and Scandinavian Reefer all with a capacity of 424,307 cbft have been sold with delivery in March and taken back on four and a half year bareboat charter.

Prospects for 2005
The exceptional rate levels during the last two years -especially those of 2004 - have brought new confidence to the reefer business. Period contracts for 2005 have been negotiated at levels 15-20% higher than the previous year. It is very likely that the spot market will continue to thrive due to the supply and demand situation. The reefer fleet is expected to decrease further, while there is no reason to believe that growing markets such as Russia will cease to boost demand.

Many producing countries such as Chile and Brazil keep increasing their agricultural exports year by year and are continuously enhancing their export campaigns. A beneficial USD:EUR rate will increase the attractions of Europe as a destination for exports, generating longer transport voyages.

The most important issue for the banana industry during 2005 will be the outcome of negotiations on the EU tariff-only regime, which are set to begin in January 2006. A differentiated tariff system is expected to make it more difficult for the Central and South American producers to compete with the ACP (African Caribbean Pacific) nations, whose banana exports will enter the EU duty free.

Other unforeseen factors may influence the market in 2005 such as tropical storms like the storms in the autumn of 2004 which destroyed many crops in Florida and the Caribbean. There could also be a looming threat of diseases such as foot-and-mouth or avian flu causing disruption to the meat and poultry trades.
Continuing competition from container lines depends on trading patterns and opportunities for inroads into the traditional south-north reefer trades. It also depends on global economic growth, and the employment of container ships in the main east-west trades.

The reduction of ownership in LauritzenCool AB to 50% will change the key figures for the reefer activities significantly in the accounts for 2005. This will, however, only have limited effect on net results, as the ownership of vessels and time charter commitments continue with Lauritzen Reefers.

Result before tax for JL’s reefer activities in 2005 are expected to be about USD 17 million.

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