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Major Q & A

[Containership Business]
Q1. How are you thinking about current freight levels? How are you proceeding to next freight negotiations?
 
A1. For Asia-Europe Trade, current market level is about 105 on basis of freight index (2008 1Q = 100). Although cargo volume still remains firm, we are closely monitoring the market, especially towards 2nd half considering uncertainty over the European economy and new buildings to be delivered in the market.
For Asia-North America Trade, current market level is 92. Speaking from shipping company point of view, we would like to further increase freight levels; otherwise, we think we will have to recover by Peak Season Surcharge (PSS).
With this in mind, we will ask customers for reasonable freight restoration during next negotiations, freight increase as a shipping company. For example, inland truck costs in North America and wages of workers at Container Terminals in North America actually froze during last few years so if costs increase, in the worst case we may ask customers to cover the cost. As railway costs will also increase, we will negotiate again with customers to cover those increasing costs.
 
 
Q2. Please let us know current status of PSS (Peak Season Surcharge).
 
A2. In Asia-North America Trade, although it differs among carriers, PSS is charged starting from beginning or middle of June. In our case, we charge full amount of PSS which was announced in mid-June. Nowadays carriers begin to introduce 2nd round PSS with most of them starting from beginning or middle of August. Each carrier starts charging 2nd round PSS and sees how it works because supply and demand is still firm to some extent, although it was felt a bit slack from middle of June to middle of July due to putting extra voyage in almost every week.
 
In Asia-Europe trade PSS started from the beginning of this year in the process of freight restoration, getting in and out of the base freight repeatedly in a series of rate restorations. Especially in Europe trade where annual contracts are few and most of them being negotiated every quarter, we look at the market on moment-to-moment basis. Accordingly, we do not look at markets in such a way as to how much is PSS part; we look at it as how much is the gross, including PSS. Actual freight of 1st quarter including PSS is level of 105 as described.
 
 
Q3.Please let us know current Container Box inventory, although it is said to be a shortage.
 
A3. There is still a shortage of Container Boxes themselves. Today's production of new Containers relies on China to a great deal; not only K-Line but also almost all the world's Containership Operators rely on China. It may be possible to say 100% as far as I know.
 
Most Container makers in China laid off workers because all carriers stopped ordering during the recession of last 2 years, resorting to scrapping and laying up of shipping company vessels. Such workers in China went back to their hometowns in the countryside and have not yet come back, which may be affected by development of local regions of China. Market price of Container Boxes is now reaching an historical high.
 
In the present situation we recognize that more Container inventory is needed because of cargo volume recovery to some extent and keeping Eco Slow Steaming. So we have ordered new Containers, but very few have been delivered. This is background of Container Boxes still running short in some trades or some regions even though each company increased capacity itself. This shortage may influence freight hike.
 
[Dry Bulk Carriers]
 
Q1 . Please advise premises for the market in this 2nd Quarter.
 
A1 . These are: for Cape-size U.S.$14,000 per day; Panamax U.S.$17,000 per day; and Handymax U.S.$18,000 per day, which are almost same as present market levels. For guidance, the actual average rates during 1st Quarter were U.S.$40,000 for Cape-size; U.S.$29,200 for Panamax, and U.S.$27,100 for Handymax, which were more favorable than our preconditions for the 1st Quarter, which were: Cape-size U.S.$35,000; Panamax U.S.$20,000; and Handymax U.S.$18,000.
 
 
Q2. Although you mentioned over 90% of your Cape-size fleet is operated under fixed long-term contracts, considering present abnormal situation where there has been very little cargo in the market, even if you once surely made fixed contracts with your customers, do they not request dissolution or some change of the contracts? Let us confirm whether we can see that the contracts have no risks.
 
A2. Market rate for Cape-size has been at an extraordinarily low level, but we have learned a great deal through various experiences during the chaotic period after 'Lehman Shock' occurred in 2008. At present, our customers are all super excellent companies. There are no risks such as them breaking contracts. Our 2nd Quarter projection was made on the basis that all contract terms will be properly kept.
 
 
Q3. Taking iron ore trade, despite major mining companies like BHP Billiton, Rio Tinto and Vale being in full operation recently, I wonder why the freight rate market for Cape-size vessels is so weak. I suppose this might be because there are too many Cape-size vessels in the market compared to cargo demand. Would you please comment including estimated iron ore trading volume after this 2nd Half?
 
A3. The question is in spite of 100% operation by iron mining companies, why the freight rate market is in this situation. This is because of receivers' side problem, buyers or users especially in China, where import quantity of iron ore has turned into minus figures for a year-on-year basis for a consecutive 3-month period.
This situation is somewhat shocking because it is the first time in the past several years except for just after the Lehman Shock, as far as I remember.
What is the reason? It is very simple because the price of iron ore has climbed to too high a level so even if they buy iron ore from overseas for producing and selling steel products in China, they cannot make a profit. Therefore, Chinese steel mills have started to reduce production at present.
 
Another factor surrounding circumstances for raw materials is that Chinese mills are now consuming more and more domestic iron ore than that from overseas. So price negotiations between the world's big three iron mining majors and each user in China, Korea and Japan, and, how spot prices of iron ore will be settled, might well be the point as to whether or not iron ore transport demand recovers in the future.
 
My personal viewpoint is that much can be expected after October, because present spot FOB price for iron ore has been considerably down so it is about time for them to be coming back to the market and start purchasing again. So, I think the freight rate for Cape-size, which is now at an abnormal level that is even lower than Small-handy, will begin to recover from September.
 
The second comment as to whether there is over-supply of Cape-size vessels is definitely correct.
 
The ratio of net increase of all types of dry bulk carriers, from Small?Handy to Cape-size, on basis of weight tons in this January to June was 7.5%. Among these, the ratio for Cape-size was extremely high, about 10%. By contrast, increase in Small-Handy was very small, 3.3%. Thus, I suppose too many Cape-size have been built, and so-called "2010 Problem" beginning to come to the surface is something we cannot deny.
 
 
Q4. Please let us know your views about freight market and spot exposure of your fleet from now on, and your present policy to make contracts with customers.
 
A4. As I mentioned previously, Cape-size market is at its worst now, which we see as picking up to a somewhat positive level in September or October, and as to supply-demand balance side, in essence, over-supply of vessel capacity has been considerably accelerated so we suppose it might take some time for any significant recovery.
 
Meanwhile, for vessels under Panamax-size, demand for coal has been materially strong, especially transport demand for coal by Japanese power utilities that has already grown to the level before 'Lehman Shock'. Now China and India will continuously need thermal coal for generating electricity, and we believe demand for grain shipments will also keep expanding, so we do not think markets for mid-small type vessels less than Panamax-size will collapse.
 
As to how we expose our fleet to the market regarding Cape-size, we Kawasaki Kisen have traditionally taken tactics whereby we expose few Cape-size vessels to the market. Basically around 10% of our fleet is saved for market exposure, with the other portion kept in fixed long-term contracts. Exposure ratios for mid-small size vessels fluctuate between 40-50%, which we also will not change drastically.
  
 
  
[Car Carriers]
  
Q. Please advise your view about cargo volume for car carriers in this 2nd Quarter and afterward.
 
A. Referring to Slide B-3, actual results for 4th Quarter Fiscal 2009 were 226,000 units for Outbound from Far East. This year's 1st Quarter's total was 240,000, while units for 'Homebound and Others' sharply increased by 15% from the last 4th Quarter.
 
Talking about present situation for our most important business, exports from Japan bottomed out and started to recover in 2nd Quarter last Fiscal year. However, they still have not grown as sharply as we have been anticipating.
 
Recently, for the past 3 or 4 consecutive quarterly periods, approximately 1.1 million cars exported from Japan per quarter have been observed in the industry total, which means that for this full fiscal year total number of new cars exported from Japan should be 4.3 to 4.4 million units while the total for last fiscal year (April 2009-March 2010) was slightly over 4.0 million units. Our view is that we can only expect recovery being at this level.
 
As I remember, the number for the term April 2008-March 2009 was about 5.6 million, so considering such point of view, Japanese auto makers now seem to have become extremely prudent in exporting from Japan.
 
As was also touched on previously in explanation about Containership Business, partly because economic trends or currency problems in Europe have affected cargo volume, each automaker revised production and shipping plans downward, especially until September, then intending to regain movement in 2nd Half.
Thus, our view is that there will be neither a sharp fall nor significant growth.
 
 
 
[Energy Transportation]
 
Q. In Energy Transporation Business, are you making profit or loss?
 
A. Regrettably, we reported loss for this Business last year, but for this 1st Quarter, it improved considerably although still staying in the red. For 2nd Quarter, as we have been gaining better visibility these days, the area of AFRAMAX or LRII tankers still does not look so fairly well. Although most of our VLCC fleet has been in long-term stable contracts, still 2nd Quarter could be slightly worse than 1st Quarter, about which we are not seriously concerned. At any rate, just small amount of loss is expected.
 
 
 
[Company/Others]
 
Q1.With regard to improvement in 1st half results, 16.0 billion yen of Containership Business and 6.0 billion yen for Bulk Shipping Business, please let us know details of those figures.
 
A1. The main reason of improvement in 1st half for Containership is freight restoration. Increased costs, inland haulage of railways in North America and other fluctuating costs and effect of rationalization, including slow steaming, offset each other, so the balance was then a portion of freight restoration. Details of 6.0 billion yen improvement in Bulk Shipping Business are that almost half of it is Dry Bulk, next part is Car Carriers and rest is Energy Transportation and others.
 
 
Q2. With Bulk Shipping Business estimate of 2nd quarter being 5.3 billion yen, which is balanced amount of 1st half estimate with 1st quarter's result 11.7 billion yen deducted, what is the background for such a downturn? Do you think volume for Car Carriers will decrease?
 
A2. One of the reasons for downturn in Bulk Shipping Business in 2nd quarter is our assumption of Cape-size market at U.S.$14,000. For volume of Car Carriers, to tell the truth, we think volume will increase in 2nd quarter; and regarding Energy Transportation, we think 2nd quarter will reflect a little downward trend.
 
 
Q3. Having heard that there's uncertainty after 2nd half of this year, is there any proactive tactics of your company for taking preventive measures at this stage when market is still profitable? What are your thoughts?
 
A3. Thinking of risk management at this period when figures have turned into black, I dare to say that our business portfolio ratio for Containership is high which is sometimes pointed out. In order to cover the Containership portion, today's Energy Transportation that remains in the red is still not effective because it will take another 2-3 years to jump into being remarkably profitable. Thus I think we will proceed on expanding sales scale of Dry Bulk sectors.
 
We are intentionally not reviewing our investment plan for new buildings. Investment will continue in a healthy way as much as possible for Dry Bulk sector which is expected to see growth, planning for a total of 200 billion yen during 3 years on average, although we reviewed and stopped investment for Containerships and others, for these three years, which is covered by our mid-term management plan "KV2010"
 
However, with regard to way of investments, we would like to expand our options such as building by ourselves, using operating lease scheme and appointment of shipowners, not the point of view of off-balance or on-balance.
 
In addition, we want to expand option of buying second-hand ships by our own financing despite counting in on-balance item as long as good condition second-hand ship is found in the market as the market fluctuates abnormally. Rather, in that sense our situation is to continue to strengthen Dry Bulk ships at this stage. We do not have concrete plan of retiring, scaling down or scrapping of old ships in our sight at the present time.

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