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| Risk management The shipping industry is highly sensitive to the markets with substantial fluctuations in the level of rates and fleet costs. Chartering vessels increases the risk profile, although JL manages this by way of portfolio management of cargo coverage, sublets and forward freight agreements. Some very limited forward freight agreements (FFAs) were used to supplement physical business activities early 2003. Each business area is responsible for monitoring and controlling its own business risks associated with supply and demand in the transport market and for including their findings in routine reporting. JL operates in USD. Changes in the Danish Financial Statements Act make it possible to prepare accounts in the functional currency, a change that has enabled implementation of a fully USD-based financial management system. The overall limits for financial risks and oil risks are defined by the Board of Directors and managed by the central treasury department. Hedging transactions are made to minimize risks and hedging only applies to the underlying commercial risk. Oil risk Bunker oil is a significant element of expenditure for JL. The figure below shows crude oil price trends since 1991. The rise in oil prices late in 2002 and during 2003 was due among other things to the war in Iraq. 
JL's policy is to hedge forecast consumption of bunker oil needed for contracted cargo volumes at the very least. The policy of whether to hedge fully or partially is determined periodically depending on forecasts for future oil price trends. Total consumption of bunker oil amounts to approximately one million tons a year. A considerable part of this, however, relates to spot market contracts for which the pricing is based on the current price on fuel, and to BAF (Bunkers Adjustment Factor) cargo contracts. Approximately 24% of 2003 total oil consumption of one million tons was hedged using financial instruments, saving the Company USD 2.2 million on oil costs. At year-end 2003 15% of total 2004 forecast oil consumption had been hedged. The market value of this hedge was USD 0.3 million. Liquidity risk Liquidity is managed via the JL cash pool, the surplus cash funds held by the business areas. At the end of 2003, cash funds amounted to USD 95.8 million, made up of cash and securities. By the end of 2003, all surplus funds in DKK had been switched into USD funds. Surplus funds are placed on time deposit and in bonds. The risk related to these primarily USD placements is controlled via limits for the duration on the total portfolio of deposits and bonds. In 2003, the rate of return on the average placement in DKK bonds over the year was 4.04% compared with the average of 2.30% on average daily DKK money market rates. The rate of return on the average placement in DKK deposits was 2.49% and the rate of return on the average placement on USD deposit was 1.15%. Currency risk JL's primary currency risk relates to non-USD costs, including estimated dividend payable to the owner of JL. JL's income is almost exclusively in USD and 86% of costs are in USD. The most important non-USD cost currencies are EUR 6%, DKK 5% and SEK 1%. All other non-USD cost currencies amount to 2%. JL's policy is to seek to increase natural currency hedging between income and costs in order to reduce currency exposure. The USD fell sharply in 2003, dropping back to levels not seen since 1997. The present US government now seems to be operating a weak USD policy in order to correct the massive US current account deficit. The present level may well be a more normal range for the USD for the years to come than the unusual movements seen in 1999-2003. 
JL's total non-USD costs in 2003 amounted to the equivalent of USD 100 million of which USD 41 million was related to DKK costs. Currency hedging reduced costs by a total of USD 8.4 million. At the end of 2003, USD 39 million had been sold forward, corresponding to a period of about six months. The market value of the hedging transactions was USD 4.0 million. If the USD exchange rate were to change by 1% for all cost currencies, it would change 2004 earnings by USD 0.7 million. At the end of 2003, the currency composition of total debt, including the effect of currency swaps, was 94% in USD and 6% in DKK. Interest risk JL's interest-bearing debt amounted to USD 196.9 million at year-end 2003, up from USD 170 million at year-end 2002. A summary of the instalment profile is provided in Note 21. Interest risk relates to net interest bearing debt less holdings of convertible securities and cash funds. Considering net interest bearing debt year end and current financial contracts, a 1% rise in the general level of interest would mean an increase in net result for 2004 of approximately USD 0.4 million. 
At the end of 2003, 68% was fixed rate debt and 32% variable interest rate debt (including the effect of interest rate swaps). During 2003, variable rate interest debt, amounting to a 26% for the total debt at year-end, was converted into fixed rate interest debt using interest rate swaps. The market value of the Company's currency and interest rate swaps at year-end 2003 was USD 7.6 million. The Federal Reserve's expansive monetary policy in 2003 kept US short-term rates at historically low levels, while US long-term rates rose somewhat because of better growth prospects for the US economy. 
Short-term rates have fallen in Europe while long term rates have been unchanged due to the disappointing growth outlook for Europe. In Japan short-tem levels are still very close to zero while long-term rates rose in 2003. Several countries like UK and Australia tightened their monetary policy during 2003 and short-term interest rates rose in these countries. Trends for 2003 are illustrated below: 
World economic activity is expected to rise during 2004, but short-term interest rates are expected to stay at the present low levels in USA, Europe and Japan until the end of 2004, while long-term rates are expected to rise. In 2005 both short and long-term interest rates are expected to rise because of tighter monetary policy and tighter fiscal policy in the US. During 2004, JL expects to convert more of the Company's variable rate interest debt to fixed rate interest debt using financial instruments. At year-end 2003, the average interest rate of JL's USD loan portfolio was 5.17%, including lending margins. Credit risk JL's credit risks mainly stem from freight receivable and prepaid charter fees. This risk is not regarded as exceptional. In previous years, there has only been minimal loss on debtors and the same applied in 2003. The risk related to JL's trading in financial instruments, securities and in placing cash funds is minimized by only trading with financial institutions with a high international credit rating. |