Car Carrier Business Q&A

Q-1: Could you elaborate on the route design you mentioned earlier? Various networks are possible depending on route ratios, so could you explain your criteria for determining the optimal route design?


A-1: There are several important points for deciding the route design. Routes can vary in scope from large to small. In order to build an even stronger customer base as I mentioned earlier, we want to establish routes that meet transport demand and allow us to maintain solid relationships with customers over the medium to long term, rather than just a single year. We will also look at whether a candidate route has the potential for future growth, before adding it to our network.

For example, we will look at whether large volumes of cargo have been continually moving from Japan to major regions of the world for a long period of time, and conversely, whether new cargo flows are also developing in other regions.

As one example, we will look at future growth in regions such as India when making route selections, and consider what preparations we need to make. This kind of network design will have an impact on profitability. Additionally, there is the contract mix that I mentioned earlier. We aim for profitability by deciding what kinds of contracts we will sign with what kinds of customers, in order to operate the route. In other words, each route will be selected based on sustainability, stability and profitability.



Q-2-1: As you proceed with route design, how have route conditions been changing from the past, and how do you expect them to change going forward? How do you expect Kawasaki Kisen's car carrier business to evolve compared to its competitors? I’m sure things have changed after the COVID-19 pandemic, but could you explain how evolving route conditions will likely change your situation with respect to competitors?


A-2-1: There are a number of main points determining our competitiveness.

The first is measures for decarbonization, as setting up a supply chain that reduces CO2 emissions is essential for our customers. Depending on how we establish a route based on a particular contract format and speed, we can differentiate ourselves from the competition.

The other important point is high-and-heavy cargo, which I mentioned earlier, as its profitability is higher than that of passenger cars. If we can increase our high-and-heavy volume faster than other companies, it will naturally set us apart from our competitors. Therefore, we need to carry out the necessary fleet development, while also building solid trusting relationships with customers, including the high-and-heavy clients. These efforts will help set us apart from competitors.



Q-2-2: Regarding those points you mentioned, could they be established as KPIs? For example, some of your competitors disclose their high-and-heavy transport ratios, so “K” Line could also share any such targets it may have. Also, they say that exports from China and India are increasing at the moment. However, it would be difficult to evaluate “K” Line’s performance without specific KPIs. This includes how much you expect your current ratio will increase by working on various measures. After listening to today's business briefing, is there any data we should be looking at, or something you can point out to us?


A-2-2: I am aware that some shipping companies disclose their ratio of high-and-heavy vehicles to other vehicles. Going forward, “K” Line would like to investigate this idea further. I will refrain from discussing transport volumes concerning India and China at this time. We will investigate ways to provide you with a better understanding of our activities in this area.



Q-3-1: You talked about trade patterns. In the past, quite a lot of cargo were shipped from Japan, but more recently however, it seems the volume of cargo shipped from China is increasing. For example, what percentage of cargo originates in Japan and what percentage is from China?


A-3-1: Regarding the current trade pattern, overall growth in exports from China is now very significant. While there are figures from various sources, I understand that this year's exports from China will be 3 to 3.5 million vehicles. At this level of cargo volume, China has already surpassed South Korea and Germany, and is second only to Japan, or even close to Japan in some areas.

It is my understanding that approximately 16 million vehicles are exported by ship worldwide, of which nearly half are categorized as exports from East Asia. The other half originate from the United States and Europe, along with India. While India's volume is still low compared to other regions, it is expected to increase going forward, and the current global situation has reached this kind of balance.



Q-3-2: With an increasing proportion of shipments originating in China, what are Kawasaki Kisen's strengths in that country?


A-3-2: While we are also working on exports from China, given our current lack of space, we are still giving priority to existing customers. Therefore, we are working on what we can, while also maintaining good communication with OEMs in China, and responding to their needs while consulting with them.



Q-4: Looking at page 17 of the briefing material, this seems to be based on the assumption that the transportation volume will increase. However, what do you see happening to the freight rate level going forward? Even looking at the one-year charter hire rate graph, the level seems to have gone up considerably. While I don't think charter hire rates are directly related to freight rates, what is your freight rate outlook for the current fiscal year? Also, where do you see freight rate levels going over the next three years? Please share your insights with us.


A-4: As I mentioned earlier, the supply shortage is expected to continue until 2025, and then supply and demand is supposed to balance out around 2027. To some extent, I think the freight rates will reach the expected levels.

Regarding the freight rates this year, although the situation is different between spot rates and contract rates, we understand it is not a situation where freight rates have fallen significantly from last year.



Q-5: Can you provide us with any update on the timeline for framework completion concerning your planned eco-friendly new fuel vessels? Earlier, you mentioned that if “K” Line is able to create such a framework for decarbonized transport ahead of other shipping compnies, it will further enhance its competitiveness. Is there anything specific you could share concerning the timeline? Of course, it’s too early for specific dates, but if you have a general timeframe that you might be discussing with customers, please explain.


A-5: The most important thing to note is that almost all of the new vessels that are currently being built are LNG-fueled. Some of them have already reached completion, but the peak period for vessel delivery will be during 2024 and 2025. Since these ships will not enter service until 2024 or later, 2023 is actually the right time to start discussing them with customers. I can't explain any details, but the rough framework will take shape this fiscal year.

“K” Line already operates LNG-fueled ships and has the necessary expertise. Since our customer base includes not only Japanese but also European and American customers, we will be able to discuss the use of these vessels directly with them.



Q-6: The three major Japanese shipping companies seem to have different views on car carrier profitability, but Kawasaki Kisen appears to be the most optimistic. Is this due to a difference in operational profitability per unit of cargo, rather than a difference in market outlook?


A-6: Nothing has been made public about the situations at other companies, so it is difficult to know the details. However, I believe that our earnings capabilities are in a neutral situation at this time. Also, even if our profitability situation were different than that of other companies, it would be difficult to say definitively, because we do not know the details of their contracts. However, it is true that the composition of routes and customers differs from other shipping companies. It is not a matter of which is stronger, or which is not. Nevertheless, it is quite possible that such differences among the companies will emerge as the years progress.



Q-7: Talking about environmental measures, LNG-fueled vessels are probably more expensive to operate than existing ships. I've heard that the fuel and capital costs are about 20% higher. Will customers be able to accept this kind of cost increase? I’m concerned that once the LNG-fueled ships are put into service from 2024 onward, Kawasaki Kisen's profitability could decline due to this kind of environmental measure.


A-7: It is true that LNG-fueled vessels are somewhat more expensive to operate than conventional ships using heavy fuel oil, due to the special nature of the fuel. On the other hand, environmental regulations will become even more stringent going forward, and for example, the EU ETS carbon trading system has just been adopted. As regulations become tighter, conventional vessels that emit a lot of CO2 from burning heavy fuel oil will incur costs due to their emissions. So cost competitiveness will increase according to the degree to which CO2 emissions can be reduced. Since this transition will continue year after year, I believe that by discussing this with our customers, their understanding will increase. Also, while there is a shortage of vessels as I mentioned earlier, almost all ships being built now are LNG-fueled. As conventional fleets are gradually replaced with LNG-fueled vessels, it is a problem that we will solve together with our customers, as part of the real issue of how to best build supply chains. As I explained earlier, I am confident we can maintain investment discipline while also helping to protect the environment.



Q-8: Given the current tight supply situation for car carriers, could existing contracts be reviewed? Since they are long-term stable contracts, they could be cheaper than current spot rates. At least as far as I can see using external data, there seems to be considerable divergence between long-term contract rates and spot rates. What direction do you see for existing contracts going into the next fiscal year?


A-8: I am unable to provide details on the rate level situation, including existing contracts. Most of “K” Line’s contracts are being renewed this year. Since they mostly reflect the current situation, none of the rates differ significantly from current market conditions.



Q-9: Regarding LNG-fueled ships, since LNG is a fuel with special requirements, each port will need to develop new fuel infrastructure to some extent. Who is responsible for LNG fuel infrastructure and how it is maintained? What about LNG tanks at ports?

Could you explain whether ports have these tanks, how each port handles a fuel that needs to be at minus 160 degrees Celsius to keep it in a liquid state, and whether there are companies ready to supply the fuel?


A-9: Talking about future environmental measures, new fuels such as ammonia and methanol will also emerge in addition to LNG. Among these fuels, LNG is currently the one with the most developed fuel supply infrastructure. While LNG cannot be obtained at just any port worldwide, the fuel supply business is now being developed so as to supply major ports and shipping routes. Ultimately, the cost burden gets placed on those who develop the fuel supply business, rather than on the shipping companies. Currently, the fuel supply infrastructure is being developed as independent businesses by energy firms and local companies.

In Japan for example, electric power and gas companies are diverting LNG directly from their tanks to supply the fuel to ports.



Q-10: How does the electric vehicle trend affect “K” Line’s business? Will there be any impact on Kawasaki Kisen due to the increased use of EVs? As EV production sites change, and sales patterns evolve in various ways, please explain how you see the impact on the car carrier business.


A-10: The demand trends for marine transport on page 12 of the briefing materials fully incorporate the development of electric vehicles and increased sales of these vehicles. Furthermore, we have included our own outlook, which is based on the premise that sales of electric vehicles will increase a little more than otherwise expected. The share of electric vehicles in sales volume will continue to increase. The main production regions may change going forward. Considering the EV production sites that we see at the moment, along with the present combination of production and consumption regions, our current demand outlook is at the level I explained. We will proceed with business development based on this premise. As the notes in the materials show, a change in the main EV production regions could lead to a decrease in volume. The specific combinations of production and consumption regions could also change, where we would need to alter trade patterns.

Going back to the route design I mentioned earlier, we will need to deal with such scenarios as well. Since the range of scenarios is still large, a realistic solution will be to respond with a certain degree of flexibility.



Q-11: I'm sure you mentioned fleet flexibility during your briefing, but how did you calculate it? Also, how do you intend to ensure this flexibility going forward? In the past, you likely adjusted supply by managing the number of your aged vessels. However, I don't think you are able to do that now, and it seems to be quite difficult to place new vessel orders. How do you ensure fleet flexibility in this current situation?


A-11: Our level of vessel deployment flexibility as a percentage has been in the mid-10s. Although it is difficult to define fleet flexibility, one way is to distribute the vessel redelivery throughout each fiscal year by combining the time charter end dates. Also, our older vessels are in a condition where they can be disposed of without incurring any extraordinary losses, so the combination of these factors is considered as fleet flexibility. As I mentioned earlier, our fleet flexibility is currently decreasing. In order to improve this however, we are adjusting the time charter expiry dates and spreading them out over each fiscal year. We adjusted the number of large size vessel charters a little earlier than now, in order to efficiently combine the ends of the charter contracts. Moreover, we still have a certain number of old ships owned by “K” Line, so by accumulating these, we would like to regain fleet flexibility year by year.




Coal & Iron Ore Carrier Business Q&A

Q-1: I have a question about the graph of stable earnings and market-linked earnings on page 22 of the briefing materials. Although the results are described as stable earnings, there has been volatility over the past 10 years, and they do not appear to be stable. Could you explain why the results fluctuate so much, and why they seem to vary more than the market linked earnings?


A-1: The graph shows operating revenues, and some of them are contracts affected by bunker prices, which are also affected by exchange rates. There are elements that vary due to these changes, and depending on the fiscal year, when certain contracts happen to finish. As a result, the operating revenues seem to fluctuate, but as a ratio, about 60%, they are stable earnings.



Q-2-1: You say that you are planning to invest 120 billion yen in fleet development. Since the number of ships are not expected to change until 2030, it seems to be an investment in vessel replacement. How do you see profits being affected as a result? Could you explain how profit will change not due to fluctuations in market conditions, but due to the acquisition of stable contracts and changes in ship assets? How profits will increase?


A-2-1: Our plan incorporates not only replacement contracts, but also new increases in anticipation of new fuel measures to be taken with major resource companies, which I explained earlier. Accordingly, we believe that we will be able to generate profits as we promote decarbonization going forward. More specifically, there is also a move by Japanese steel mills to stop using certain shipping routes due to a decrease in crude steel production. This is partially incorporated into the plan. Although it may appear that the total volume will not increase, in reality it will and we will take on the necessary challenges.



Q-2-2: You say that the number of contracts is increasing, but if the number of vessels remains the same, I don’t see how your revenue level can increase. Could you explain how this will affect “K” Line’s profits?


A-2-2: By increasing our customer base, we can improve the turnover and utilization rates for our ship operation efficiency. Along with the structural reforms we implemented in fiscal 2021, we are working to improve profitability by balancing cargo contracts and fleet over the short and long terms.



Q-2-3: In the past, I believe you had numerical targets for improving profitability over so many years through structural reforms including charter contract cancellations. Now however, with the target profit compositions to be achieved by 2026 and 2030, what kind of impact will there be on profits?


A-2-3: That shows how much improvement we achieved through structural reforms in past years. So if we assume the same market conditions, we can expect similar results. Now however, market conditions have changed, so it is difficult to come up with specific forecast amounts at this time.



Q-3: Page 27 of the briefing materials indicates that your customers are Japanese and Korean steel mills, major resource companies, and mills in India and the Middle East. Roughly speaking, what are the profit composition percentages coal and iron ore carrier business in drybulk segments? I would expect the largest share of profits to come from Japanese and Korean mills, but please correct me if I’m wrong. Also, could you let us know your goals for improving these ratios by 2030?


A-3: I’m not able to share many profit details with you, but as you can imagine, nearly half of our operating revenues come from Japanese and Korean steel mills. Also, 15% of operating revenues come from the India and Middle East.



Q-4-1: On page 29 of the briefing materials, it says the number of short-term charters is expected to increase. If that happens, won’t the number of short-term contracts also increase, making it difficult to manage? It seems your market exposure would increase considerably. Could you comment on this?


A-4-1: We plan to align short-term contracts with short-term fleet composition, so there will be no exposure in that respect.



Q-4-2: Does that pose any challenges operationally? Is it easy to efficiently combine short-term charters and short-term contracts?


A-4-2: When a vessel actually joins our fleet, we don’t view it from a short-term or long-term perspective. As an economic arrangement however, we simply match the volume of short-term contracts with the number of short-term vessels.



Q-5: Could you talk about the potential for customer growth in India and the Middle East? Indian crude steel production in particular will certainly increase. Although there is the problem of low grades, India also has iron ore and coal reserves domestically. Also, looking at it from the perspective of Australia, which is a supplier of coal and iron ore, since it is slightly closer to India than it is to Japan and South Korea, it would be a bit disadvantageous to transport those materials to India, in terms of ton-miles. Considering these points, please comment on what kind of presence of customers in India are, for “K” Line.


A-5: As you pointed out, India will continue to grow. Indian crude steel production, which is currently 100 million tons per year, is said to increase to 300 million to 400 million tons by 2030. Certainly iron ore can be mined in India, but for the time being, it will have to rely on imports of coking coal from overseas. I believe that Indian imports of this material will increase at the same rate that crude steel production increases there.

Additionally, as you say, the grade of iron ore produced in India is also a factor. However, I think the trend there will be a gradual increase in imports. Finally, our business in India involves not just the import of coal and iron ore from overseas, but also transport of these materials from one coast of the country to the other. We have also begun coastal transportation in India for JSW Steel using Capesize bulkers, and this is also an area with growth potential.




LNG Carrier Business Q&A

Q-1: We understand the LNG carrier business is stable over the long term but, could margins in fact fluctuate considerably? Given the current tight supply situation, will margins be higher than in the past?


A-1: When you sign a long-term contract, your profit remains constant during that period. As you know, the LNG carrier business is a vessel-ownership business, where profits are earned not by operating the vessels, but by chartering them out. Therefore, once the contract period has been determined, the daily charter hire is also set, and it remains constant.

Meanwhile, there is a market for short and medium-term charter contracts, which is not our business target area, and this is where the charter hire rates fluctuate. That's why we focus on long-term contracts whenever possible.



Q-2: I understand that the big three Japanese shipping companies are also the top three players in the LNG carrier market. What are considered to be the appropriate profit levels, and is there still room for charter hire increases? I don't know much about the competition/competitor situation for the market including non-Japanese shipping companies, but I get a sense that the profit level has always remained roughly the same. Could you comment on how you see this profit expanding?


A-2: Nearly 40 years have passed since LNG transport became major, and ownership of LNG carriers is not just for limited shipping companies and players in the market. There has also always been competition. As was the case with the Qatar LNG project, the bigger the project, the more bids it will attract, and the more competition there will be. Therefore, bid selection is basically based on a combination of charter rates and ship management capabilities.

Of course, under the current situation, it is difficult to imagine that charter rates will continue to decline. If the charter rates rise quickly due to a shortage of vessels, it may become the case for a short-term project. I understand that higher charter rates would be quite difficult for a long-term project.



Q-3: What is the return on investment for an LNG carrier? I think there was a period of time before the COVID-19 pandemic when the return on investment was quite low. Now things have changed after the pandemic and with recent geopolitical developments. What is the current return on LNG carriers, and what is the outlook going forward?


A-3: The environment surrounding LNG carrier business has changed dramatically in the last two or three years. First, the price of LNG began to soar in the fall of 2019, before Russia's invasion of Ukraine. With climate change as a possible factor, renewable energy in Europe was out of operation for a period of time. Wind and solar power generation stopped from the beginning of that autumn into winter, and the demand for LNG as an alternative fuel surged, causing the price to rise rapidly. In February 2022, due to Russia's invasion of Ukraine, Europe began to avoid buying LNG from Russia. While LNG was still being sent to Europe until the first half of last year, after that, no LNG has been sent from Russia to Europe.

Of course, if this situation continues for the long term, it is possible that the return on LNG carrier investment will increase over time. However, I think there is a limit on how far into the future we can reliably predict. The major players in the LNG carrier business still remain in the dark on this question.

Natural gas equivalent to approximately 100 million tons of LNG was transported annually from Russia to Europe. In order to transport the same amount of LNG from the east coast of North America to Europe, about 100 additional ships would be required. The annual shipbuilding capacity for LNG carriers is around 80 to 90 vessels globally. Therefore, given the current situation, even one year is not enough to meet the new demand for LNG carriers.



Q-4-1: You indicated that your LNG carrier business is based on long-term stable contracts. However, is there any possibility of running the business on free vessels? If the LNG market is expected to expand going forward, wouldn’t it make sense to prepare LNG carriers without long-term contracts for the time being? Then wait until the market is booming. If you are managing risk for the LNG carrier business as a whole, wouldn’t some exposure to market conditions be acceptable?


A-4-1: When it comes to non-contract free vessels, as long as opportunities are evaluated from a business perspective, it just depends on how much risk you want to take. While market conditions are very good at the moment, in terms of geopolitical risks, we don't know if they will continue for the next 10 or 15 years. That makes it difficult to consider newly built vessels without long-term contracts.

However, when it comes to ships where the 15-to-20 year charter contract has expired and the investment has been recovered, a business decision can be made to either sell the ship, or depending on the contract, to charter it out to a customer that values “K” Line's very high ship management standards. I think this approach to free vessels might be possible after a certain amount of time has passed.

Of course, under our current medium-term management plan, there are no vessel candidates for that kind of free vessel business. However, there may be business opportunities for such vessels during the period of the next two or three medium-term plans.



Q-4-2: It seems that the market for LNG transport is dominated by long-term contracts. Does this mean that LNG carriers are tied to major projects to a large extent, and that short-term spot businesses are not so common globally?


A-4-2: It is true that there are many large long-term LNG projects. However, many of the projects being implemented by major oil and gas companies are relatively medium-term, covering 5 or 7 years. Therefore, it is not necessarily the case that the LNG market is biased towards the long term.



Q-5: Could you explain the changes in LNG trading patterns that have occurred over the past two or three years, as well as Kawasaki Kisen's profit results and strategies? As you explained, LNG demand was already gradually increasing before the invasion of Ukraine due to factors such as a decline in the capacity factor for wind power generation. Then European demand for LNG increased significantly, partly due to the invasion last year. While the situation probably won’t change in the near future, do you see any changes in the LNG trade pattern over the medium and long-term, along with Kawasaki Kisen's corresponding profit levels and strategies?


A-5: Regarding LNG projects, I mentioned earlier that the return on LNG carriers has been declining over the past few years. This is because the LNG projects themselves have come to a standstill. Projects that have been anticipated for the past few years are only 2, the large Qatar project and project in Mozambique, which have yet to be finalized. Other than that, everything else has been halted.

Now that Qatar is trying to further improve its capacity, and drilling for shale gas in North America has begun, there is a possibility that the number of long-term projects will increase. Therefore, we believe we can add more projects during the period of our medium-term management plan, by fiscal 2026 or later. This would also further contribute to our stable earnings base.



Q-6: While you say that LNG carriers are a ship-owning business, the briefing also emphasizes your safe vessel operations. Could you explain how an evaluation for safe operations relates to a vessel owning business?


A-6: We charter out the ships that we own, and that also includes the crews on board. Therefore, we charter out our vessels along with our technology for safe and reliable ship handling, which is highly regarded worldwide. If we don't maintain and improve that aspect, then of course customers won't choose us.



Q-7: Regarding the contract you recently signed with Diamond Gas International (DGI), I am wondering why DGI did not select another more likely shipping company based on its position as a wholly owned subsidiary of Mitsubishi Corporation. Is there anything you can tell us about how Kawasaki Kisen won DGI’s contract, which could have gone to a member of its own corporate group?


A-7: We have worked with Mitsubishi Corporation in various ways, in connection with the Tangguh LNG project in Indonesia. The contract itself began nearly 15 years ago, and since then we have been discussing various opportunities with them. Recently, we were also approached by Mitsubishi’s subsidiary DGI concerning a project. We ended up being selected by DGI based on our high quality of ship management and safe operation.



Q-8: Regarding shale gas production in North America, I heard that many potential LNG buyers will need to arrange vessels to transport LNG cargo. Please explain how this came about, the historical background, and whether there are merits to this method.


A-8: In the LNG business, the sellers usually write the contracts with a destination clause, which prevents product resale. In the case of American natural gas, it has always been used domestically. Since there was never any idea of exporting it overseas, there was never a destination clause in the contracts. As traders have the idea of purchasing American LNG and distributing it to various countries, American shale gas sellers will not have to arrange their own ships and determine the destinations.



Q-9: Regarding your ROIC, do you aim to meet the general standard of 6% to 7%, or is it acceptable to achieve something a little lower? You say that during the medium-term management plan period, 100 billion yen will be invested to the vessels to be delivered during the period and 60 billion yen will be invested to the vessels to be delivered after the period. Roughly calculated, that would mean a return of about 10 billion yen. Is this how “K” Line makes its investment decisions?


A-9: I will refrain from giving specific numbers, but of course, we set investment criteria that needs to be fully met, and we only proceed with projects that meet our standards.



Q-10: In the case of the LNG business, I believe that it is generally recognized as profit on equity in earnings for accounting purposes. Could you explain your ROIC approach in this case?


A-10: We set a minimum ROIC rate for each business division in consideration of the cost of capital, and ask them to meet it. When the equity method is applied to the LNG business, it is recognized as a return on the equity contributed by “K” Line. We proceed with investment based on the condition that a clear target return can be achieved. Even though it is called a project, it relates to “K” Line’s equity.



Q-11: I'm sure there are also factors such as the war in Ukraine and other issues, but has the drastic change in Kawasaki Kisen’s financial situation over the past two years had any impact on your current strategies? Could you tell us if you have made any strategy-related changes, including whether past financial situations have constrained your activities?


A-11: Basically, there have been no changes. We have never been in a situation where we couldn't make a decision due to a bad financial situation, or a customer couldn’t choose us for the same reason.



Q-12: Going forward, it seems that seafarers could be a risk factor when looking at business expansion. How much impact could this issue have if the pace of expansion changes, and the number of LNG carriers exceeds or falls short of the projections you provided?


A-12: Issues on seafarers are a risk as you pointed out. Consequently, we are centralizing our ship management functions in Singapore and will work on expansion there. By doing this, we will strive to expand rather than just maintaining our LNG carrier business.




Sustainability Management Q&A

Q-1-1: Regarding “K” Line’s governance, I believe that the function of your Board of Directors is shifting from a management role to a monitoring one, with the proportion of outside directors exceeding 50%. Given these circumstances, could you discuss the changes in the role of the Board of Directors, along with the expectations as top management, what kind of organization and scheme you are thinking of with regard to the speed of decision-making by executives, and the transfer of authority?


A-1-1: The board including outside directors are discussing governance, but at this point we have no plans to change the organizational structure of the company. In order to increase our effectiveness as a company, we are reviewing the execution of important business operations, as well as approval criteria to ensure prompt business execution.

Regarding the guidelines for meeting of the Board of Directors, as investment projects are extremely important to us as a shipping company, while we are working to increase investment discipline, the board must decide the company’s future directions based on thorough discussion of all large-sum borrowings and investments. Moreover, regarding important directions for the company and business strategies such as the medium-term management plan, “K” Line wants to further strengthen operations so that the board can devote more time to in-depth discussions.



Q-1-2: You said that the Board of Directors intends to thoroughly discuss large-sum investments and borrowings, and that it will also discuss large payments based on approval criteria. I think ships can range in price from several billion to 10 billion or even 20 billion yen. If, for example, there is a purchase of only one vessel, will the board of directors discuss it? Or will any such investments or loan applications, including corporate acquisitions, have to be submitted to the Board of Directors? Please let us know where the threshold is to be set.


A-1-2: I can’t give you any specific numbers, but we have strict standards for large-sum investments. Investments to purchase very expensive ships fall under the category of large-sum investments.



Q-2: What are your thoughts on using methanol-powered ships to achieve your zero-emission strategy? Japanese shipping companies, including Kawasaki Kisen, are mostly adopting LNG-fueled ships for lowering and eliminating carbon emissions. Meanwhile, European shipping companies seem to be moving toward methanol ships even as we speak. Perhaps Japanese and European shipping companies have a slightly different approach to green fuel. What are your thoughts on this, and what advantages, if any, does LNG have over methanol as a ship fuel?


A-2: Some European shipping companies are working on methanol as a fuel for their vessels. If my understanding is correct, gray methanol only reduces greenhouse gas emissions by about 10% compared to heavy fuel oil. On the other hand, there are eco-friendly versions such as blue methanol made from biomass, and green methanol synthesized using green hydrogen produced from renewable energy. At this stage, it is very difficult to secure substantial volumes of these fuels, or even a supply that is adequately cost competitive.

The advantage of methanol is basically that the investment in capital expenditure is relatively small, and because it can be burned at normal temperature, engine modification is not that expensive. On the other hand, considering the cost and supply challenges for methanol, I think that LNG, which reduces CO2 emissions by 25% to 30%, is more feasible and cost effective at this point.

 However, as I mentioned earlier, we will have various options for zero-emission fuels going forward. Therefore, while keeping a close eye on the relevant regulations and technologies that seem to change on a daily basis, “K” Line will ensure that it is always adopting the best options.



Q-3: With regard to governance, “K” Line’s financial situation has changed remarkably over the past two years. Has your company made any changes in its approach to risk-taking as a result? As you mentioned the phrase “proactive governance,” would it be all right for “K” Line to add a little more risk to its risk-return tradeoff, and perhaps raise its risk threshold a little higher? Please tell us whether the Board of Directors has been discussing this or whether the topic is on its agenda.


A-3: Basically we have not changed any part of our risk approach. In fact, we believe that it is extremely important for our current business strategy not to take excessive risks and to maintain investment discipline. In the past, the maritime shipping industry has always been exposed to fluctuations in market conditions. Accordingly, we look back on whether our past investment activity has led to increased volatility, and ensure good returns by always investing in a way that matches customer demand. “K” Line places a lot of importance on its policy to avoid excessive risk-taking. Despite changes in our financial position over the past two or three years, we have not changed or loosened our policy and are working hard to tighten it up.



Q-4: Could you explain the operating structure of the Sustainability Sub-Committee mentioned on page 65 of the briefing materials? There appears to be a reporting mechanism for this committee, while other teams and committees also report on environment-related issues. Could you explain briefly who is reporting what under this system?


A-4: The Sustainability Sub-Committee deals with ESG issues in general, while the GHG Reduction Strategy Committee specializes in technical issues related to the regulations in each country, including various maritime regulations. When it comes to the environment, there are various other issues that we must also address as a company, such as border carbon taxes and emissions trading systems. These are some of the ESG issues that the Sustainability Sub-Committee investigates. It also addresses them, and provides feedback to senior management.



Q-5-1: To promote human resources diversity, you are using the proportion of women in managerial positions as a KPI, and naturally it is important to increase this. When it comes diversity promotion there does not seem to be a single definition. It can be utilizing outside resources such as foreigners, for example, or making use of other human resources and young people. Moreover, if a company does not promote such diversity efforts, it may not be able to revitalize itself and achieve its goals. What are your thoughts on this topic?


A-5-1: Let me talk about diversity, including my personal thoughts.

Japanese companies have for decades maintained an employment system that treats workers as company members rather than individuals in specific job types. However, work styles are now changing in various ways, including the adoption of Western-style job-type employment. There are many different types of employment. As a company, we are looking at ways to re-energize our human resources. Currently, about 80% of our head office employees joined us as new graduates, while 20% are mid-career hires.

During the first 10 years after new graduates are hired, they are placed in corporate and business divisions. There they are trained by getting a thorough understanding of how the shipping business works. After putting them in several different departments over 10 years, rather than just moving them into the traditional Japanese seniority system, we now evaluate each employee by looking at their abilities and achievements. In some cases employees are given a rapid promotion. The aim of this is to help boost employee motivation. Since there are various functions that “K” Line still lacks and abilities it must augment, the company carries out mid-career recruitment year round to meet its human resources needs. In this way, we are able to augment and strengthen the human resources and expertise that we need as a company. By combining these two employment methods, we are aiming to promote the revitalization of our human resources while ensuring diversity in various ways.



Q-5-2: What kinds of issues is “K” Line currently facing? Are there areas where you feel improvements need to be made?


A-5-2: “K” Line needs to further improve its own expertise relating to marine transportation. Of course we work with expert partners, but we also need to understand new maritime technologies as much as we can. Regarding other functional areas, we need to determine how much we can handle on our own, and develop an approach for the future. Since our need for high levels of expertise has increased significantly, especially in fields such as digital transformation and legal affairs, we are thinking about utilizing outside knowledge or external human resources who have the required experience, abilities and expertise.



Q-6: On the topic of human resources, please tell us your typical turnover rate in the past, and if there have been any recent changes or trends.


A-6: They say that a company’s turnover rate should not exceed the benchmark of 7%. There was a period when our business performance was suffering a great deal, and at that time our turnover rate almost reached the 7% level. It has improved a lot since then.



Q-7-1: Regarding the Carbon Intensity Indicator (CII) rating for vessels, I think that requirements for CII certification will take effect next year. What is the situation for “K” Line vessels? Also, when CII requirements take effect, slow steaming and vessel scrapping is expected to increase. Pease tell us if there have been any changes in the situation that you were anticipating.


A-7-1: CII is an environmental regulation of International Maritime Organization (IMO), and it will require us to reduce our carbon emission efficiency by several percent every year. Vessels will be rated on a five-level scale from “A” to “E.” The “D” rating requires improvement within 3 years, while an “E” rating requires improvement within the following year.

To facilitate CII compliance, we can check the carbon emission efficiency results of our vessels on a daily basis using our integrated ship management system K-IMS, which I explained earlier. It has a function that can also perform simulations of carbon emission efficiency for our fleet. We have already completed a simulation of how many ships will likely receive D and E ratings. As a company, we are steadily implementing measures to address these issues.

We are still in the stage of talking with customers, and it is not yet clear whether they will actually avoid ships with an E rating. There are also problems with the rating system itself, and different results can be obtained depending on how the vessel is operated and how the calculation is made. Since the ratings and their usage have not yet been fully determined within the industry, we need to look a little more closely at the potential impacts from this year into the beginning of next year. We are placing a lot of attention on this matter.



Q-7-2: Am I right in assuming that the proportion of your ships that could get a lowest E rating is small?


A-7-2: That is correct.