Pacific Basin warns on write downs as dry bulk market remains weak

The board of directors of Pacific Basin Shipping Limited (the “Board”) wishes to inform the Company’s shareholders and potential investors that the Group is expected to record in its consolidated 2014 results:

(a) a significant non-cash provision of approximately US$101 million for inward chartered vessel contracts; and

(b) an accounting non-cash charge of approximately US$31 million relating to the fair value change of bunker fuel swap contracts.

BACK GROUND

The dry bulk market continues to be weak. Despite reduced global dry bulk net fleet growth in 2014, the market has yet to fully absorb the supply overhang following the 2010 to 2012 newbuilding boom. Demand weakened in the second half of 2014 due primarily to decreasing coal imports to China and the continued Indonesian unprocessed minerals export ban. In addition, during the fourth quarter of 2014, the reference bunker fuel price dropped 45% (broadly reflecting the decline in global oil prices) resulting in early signs of a general increase in vessel operating speeds, effectively increasing global shipping supply further. In early 2015 the bunker fuel price has continued to weaken. This makes the outlook challenging.

CHARTERED IN VESSEL COSTS

The Board has reviewed the costs of the Group’s pool of inward-chartered Handysize and Handymax vessels.

These remain higher than the current and likely market rates, primarily due to the higher costs of long-term charters entered into in 2010 when an earlier return to long-term market rates was expected. As a result, the Board estimates that the costs of the Group’s vessel inward charter obligations exceed the income we expect to receive under them. Based on the Board’s preliminary evaluation of the consolidated management accounts of the Group, it is expected that a provision of approximately US$101 million for onerous vessel inward-charter contracts will be recorded in the Group’s consolidated income statement for the year ended 31 December 2014 (the “Year”).

HEDGED COMMITTED FUEL COSTS

The revenue generated under the Group’s long-term contracts of affreightment (“COA”) normally includes the cost of bunker fuel based on market prices at the time the contract is originally signed. The Group enters into bunker swap contracts to remove the risk of bunker price fluctuations for these future voyages. Consequently, the Group’s net cost for the bunkers is the combination of (i) the actual fuel cost and (ii) the payment to or receipt from the bunker swap counterparties. This net cost is in line with the revenue element for the bunkers under the COA, producing no material realised gain or loss compared to the contracted cost after the voyages are completed.

However, relevant accounting rules require the bunker swap contracts to be adjusted to their fair values on the balance sheet, resulting in the change between each reporting date being charged or credited to the income statement. The significant drop in global fuel prices caused a reduction in the carrying value for the bunker swap contracts at the end of December 2014 and an estimated non-cash charge of approximately US$31 million is expected to be recorded in the Group’s consolidated income statement for the Year. The bunker fuel price has continued to drop since the year end. Whilst the current price does not impact the 2014 year end position, for illustrative purposes only, a 5% drop in the bunker fuel price from that of 31 December 2014 would increase the non-cash charge by approximately US$3 million.