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Major Q & A

[Containership Business]
Q.1     Would you please tell us your freight rate assumptions for this 4th Quarter, based on the freight index in slide page 9?
A.1     Referring to the Containership freight index indicated in slide page 9, assuming freight rate level during 2008 1st Quarter as 100, here mentioned 3rd Quarter figure is 99 for Asia-North America trades, and 94 for Asia-Europe trades.
In terms of our premises for the 4th Quarter, we see a several-point drop from the average rates for the 3rd Quarter. Because the portion of one-year contracts is higher for Asia-North America trades than in Asia-Europe trades, freight rate volatility caused by spot contracts is less in the Asia-North America.
Q.2     Would you further advise whether you count rate increase in Asia-Europe trades or Peak Season Surcharge for Asia-North America trades which were scheduled from January in your freight rate assumptions for the 4th Quarter mentioned above?
A.2     We have succeeded to gain the Peak Season Surcharge for Asia-North America trades to be charged from January on part of spot cargoes.
As we now go into Chinese New Year holidays, and until cargo movements start to pick up around March, freight rate for spot cargoes is slightly down, just as usual every year, in both Asia-Europe and Asia-North America trades, which we have included in setting our freight rate preconditions.
Q.3     As you mentioned in your presentation that freight rates in North-South trades declined more than your expectation, would you please explain in a little more detail? Roughly what percentage was the rate drop, and due to that, when and how is each shipping company responding to it?
A.3     Taking the freight rate index that presumes the rate level during 2008 1st Quarter as 100, that for the North-South trades has decreased by about 10 points at present.
Regarding counter-measures against slack season, such as squeezing some services, we have been studying with our 'CKYH - the Green Alliance' partners about various points, and we have now decided to stop some of our service loops for a few weeks after Chinese New Year holidays.
Q.4     Looking at lifting volume from Asia to North America or Europe of others in the same shipping business, both domestic and foreign, until November it continued to increase for year-on-year comparison, but coming into December, started to decrease for year-on-year basis, and even in the case of some shipping companies, loading factor worsened considerably. So, please advise whether you have found any changes in terms of demand including present actual conditions.
A.4     As to cargo demand, as far as we have been aware, it has not declined from last year. In case of ourselves, loading factor remained at a fairly high level partly because we have not increased our ship space itself from the previous year.
As a usual annual cargo trend, after the Chinese New Year holidays comes the so-called slack season when cargo volume declines. How cargo volume is picking up after the slack season, and what its trend will be in April, we are now carefully watching.
Q.5   In order to maintain the level of next year profit from Containership Business the same as this year, approximately how much cargo volume, or freight rate level, do you need to increase?
A.5   If you are asking about break even point for freight rate and cargo volume, then, as you know, this 4th Quarter expectation is almost break even, and so I believe you can grasp rough image from data quoted in these slides.
Although we understand that there are no specific factors that will increase our costs tremendously compared to the other shipping companies during next fiscal year, for Asia-North America trades, however, as a general trend rail and terminal fees will be increasing by 3 - 5 %, so even if present freight rate level once declined only returns to April-December 2010 condition, it will not be enough. Additionally, bunker oil price is climbing and we cannot expect it will soon be falling below 500 U.S. Dollars, to around 470 Dollars. To make up for these rising costs, we have to negotiate freight rate up by 5-10 points from fiscal year 2010 level with insistent resolution in April and May, which is what I now have in my mind.
Furthermore, last year during summer peak season, we succeeded to receive almost full amount of PSS (Peak Season Surcharge) somewhat due to lack of ship space and container boxes, which would be among the factors we have to consider in looking toward next year.
These will also depend on how much the balance between supply and demand tightens.
Q.6   Possibility of Suez Canal closure due to the chaos in Egypt is pointed out. Would you please suggest what kind of effect can be considered to Containership Business?
A.6   According to an E-mail from Egypt this morning (31 January), which should be last night's information I suppose, vessels can transit through Suez Canal. However, cargo handling in some container terminals in Egypt has been suspended due to labor shortage, which could impact even the supply demand condition if the situation is further expanded, I think.
Q.7   As it is reported in some shipping or logistics magazines that you might decide to invest in larger type containerships, have you been seriously investigating the effect of investment in them within your company? The point is that in order to cut per container box cost, I wonder whether growth in vessel size is the only course to take, even under such situation where profitability of your containership business is somewhat lower than foreign containership companies.
A.7   In terms of the investment to larger type containerships, here I would like to announce again that I have only instructed our staff to start studying for verification, and have not indicated that we should actually proceed to invest in larger types in reality.
As of 1 April last year, when I took over president position, the previous fiscal year that just ended the day before at the end of March 2010 showed Ordinary Loss was 67.0 billion yen and almost all of that loss was from Containership Business. Nevertheless, there were opinions that we should soon acquire larger ships.
Of course, just to reduce ship cost per TEU, the correct answer is to obtain larger ships, which even an elementary school kid can calculate, but only if we can eventually fill the vessel 100% with cargoes is the 13,000 TEU-type vessels better than 10,000-type, and 16,000 better than 13,000.
At current existing container terminals, max acceptable vessel size might be 16,000 TEU-type physically, and so we know 16,000-type vessels have the best competitiveness as per one vessel or per one container box anywhere on the earth.
However, we wonder whether it is the right choice! Rather, would it be better to operate 8,500-type most effectively? Or, should we renew them to 10,000-type? Alternatively, would it be more advantageous to have the same 13,000-type as our alliance partners, COSCO and Hanjin, have already ordered and which are scheduled to be delivered 1-2 years later?
I only have instructed our people to verify such points. As quoted in specialty magazines, the point is that I only lifted the ban on investigation, and which direction we should go next, Yes or No, would have to be finally decided around the end of this November. If we are to build ultra-large containerships, this might be our deadline, which is time span under which we are now working.
Of course, including what is the best use of our present operating vessels of 3,000, 4,500, 5,500 and 8,500-type, etc. as a premise, we will boldly and carefully pursue our study.
Q.8   Considering new buildings of ultra large containerships, in case of Asia-Europe routes, including the effect of slow steaming, you need 10 vessels for one service string. So, if you actually make this investment, do you have an intention to order about 10 vessels at a time?
A.8   As you point out, if we wish to maintain a fleet as a company, we have to provide an investment amount of roughly 13.0 billion yen times 10 vessels, as such containership costs are over 10.0 billion yen at least. However, it is not necessarily the case that we must build all 10 vessels alone.
For example, there are other options such as ordering new vessels jointly with Yangming, or purchase some of the new ships that Hanjin has already ordered.
We should first make an economic market analysis as to how many vessels our CKYH-Green Alliance should operate to hold service strings calling at Japan, or those not calling at Japan, and then we must decide how many vessels each Alliance member must throw in and with what vessel capacity so that each of us can successfully continue dealing with our customers.
Our present share in containership market is around 3.5%, and so of course we would like to increase it to say 5% or so in our mid-term management plan. To extend to 5% of market share, how many vessels are required as minimum to correspond with that share, and among them how many ultra-large ships should be included, if really essential. In case we do not decide to have ultra-large types, how we can obtain necessary space is side issue among options we can choose.
[Dry Bulk Business]
Q.1     Please let us know your views about spot exposure of your fleet from now on considering 32 newbuildings to be delivered next year.
A.1     As to our basic strategy of Dry Bulk Carriers, we will not change the ratio of exposure of our fleet to the spot market. For next year we will not change our basic policy of combination of spot exposure and long-term contracts, still keeping 10% of our Cape-size fleet, 30% of our Panamax, 40-45% of our Handymax and over 50 % of Small Handy for spot exposure.
Q.2   Don't you have any intention to decrease spot exposure next year? Are there countermeasures for decreasing spot exposure by posting extraordinary loss caused by cancellation or re-delivery of charter contracts which have negative earnings?
A.2   As we said, we do not have any intention to review our basic policy as of today.
Although Cape-size market is very low at the moment, there's not so much impact because our spot exposure of Cape-size is very limited in the 4th Quarter. I know you are worried about year 2011 and although our fleet is expanding by delivery of newbuildings, we think negative impact by decline in market will be minimal because exposed ratio to market in next year was 15% at the time of our estimate last December.
In addition we do not think that current market rate of $6,000 for Cape-size will last long. In each sense we think we should not overly despair about profitability of Cape-size next year.
As for Panamax, we would like to continue 30% for spot exposure as we previously stated.
Handymax and Small-Handy were originally are not fit for long-term contract, but if we rush to fix the contract when market is bad, we think we could lose chance for profit in the future.
Q.3   How much does capital cost for vessels increase as some newbuildings are delivered next year?
A.3   We have some high price vessels which are large-size ordered at the peak of shipbuilding in 2006-2007. However, we had fixed long-term contracts for those vessels at the same time we placed those shipbuilding contract orders, so we are not too worried. In case of small-size vessels in Handymax class where some capital costs may increase around $1,000 - $2,000 per ship, we think we do not need to be overly worried as that is within normal market fluctuation range.
Q.4   If charter rate of $6,000 for Cape-size is abnormal value as you commented, how can the rate recover to normal value? How do you think it will recover from its very low current level to a moderate level?
A.4   The reason I said abnormal value is that current level is beyond what is required for sustainable business as a shipping company. What I can say is that it is impossible to maintain business at such a low rate, so it will return sometime. This is the general idea.
In addition, one more factor is the seasonal factor. It is now Chinese New Year for example when more than 60% of Iron Ore sea transportation is destined China; during Chinese holidays, Dry Bulk market is in a slack season and market declines every year in this season.
It is said that negative impact from Queensland, Australia flooding was 15 million tons of Coal shipped from Australia during this January-March out of total 60 million tons per year. If a Cape-size ship transports 1 million tons per year, total impact for demand is 60 Cape-size vessels. We think it is possible to explain the reason of market decline of Cape-size by this impact. As shipments of Coal from Australia will be normalized in March or April, assuming that it will not rain from now on, the infrastructure should recover well so we think the market will come up again clearly at that time.
As for return of rate level, we are afraid it will be affected to some degree as a ceiling as there's also the problem of excess supply tonnage, but we don't think current $6,000 level will continue anyway.
Q.5   What can you do as countermeasure against excess supply of Dry Bulk tonnage?
A.5   We think drifting vessels is an option of our own if charter rate of Cape-size declines to $6,000.
However, China will further develop and in India, there will be more demand as infrastructure is built because per-capita consumption of Iron and electric power, for example, is 20% or 10% compared with China which means that demand, including grain, has not peaked yet. So this is not the same situation whereby our company studied laying up vessels that was seen in Containership business.
Q.6   How is the impact of Korea Line?
A.6   We chartered out 1 Cape-size ship to Korea Line. The company is under insolvency proceedings so that ship will be re-delivered to us. In that sense, there will be impact of one ship.
Q.7   In order to make a profit next year at same level as this year, how much do you think average charter rate is needed? Please advise your view.
A.7   To explain simply, nearly $30,000 is needed for Cape-size and around $20,000 for Panamax. In the case of BDI, since current BDI is 1,200, if it recovers to 1,600 -1,700 level, we think we can post a profit that will be almost same as this year.
Q.     Considering that you are undertaking next mid-term management plan, please let us know what you are thinking as major theme of the plan and the picture you have in your mind.
A.     Current 3-year management plan was developed at the worst time. So, if we do not review the plan and just keep going along as is, it will become inconsequential in details. For example, in the mid-term management plan, though we estimated about 10.0 billion yen loss for containership business for this fiscal year, the precondition has been thoroughly changed.
Further, what we learned in containership business is that paying too much attention about making our fleet off-balanced in our mind to significantly reduce number of ships we own, has sometimes resulted in a lack of flexibility when we needed to adjust our fleet size.
Superficially, vessels under long-term charter are in low cost and off-balanced, but when we would like to return vessels before contract term, some penalty is charged. Taking containerships, we paid a few billion yen last year. Now we will review how we should have our fleet considering both flexibility of fleet and risk management by way of increasing our own vessels even if our on-balanced assets are mounting up.
Another view for our new management plan is that our ROA should be much different depending on the premises of exchange rate for these 3 years, which is not our own effort for business. I would like to prepare information materials so that all of our employees, board members and you can understand in the same way including how to greatly improve the index and which level it reaches.
As I suppose there might be no surprise moves in terms of contents for the new plan, in line with recovery trends in this year, what we can see in 2011 and for 2012?, I would like to develop the plan so that stabilization and sustaining of profit will both come into our sight.

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