Q-1: Supply and demand are expected to balance in 2026. In that regard, please explain your outlook for future freight rates. Currently, freight rates are high compared to the pre-COVID level. I would like to confirm what effect the balancing of supply-demand will have on freight rates.
A-1: Given that supply and demand will balance in 2026, we believe that marine transport freight rates, a portion of which have surged, will enter an adjustment phase. Unlike the pre-COVID period, instead of the market suffering from an oversupply of vessels, supply and demand are expected to balance out in coming years. Therefore, while there will be some amount of adjustment in freight rates, we expect the rates to hold at a certain level.
Q-2: Many of the new vessels to be delivered through 2026 have been ordered by Chinese companies, and these vessels are expected to transport automobiles exported from China, mainly EVs. In conjunction with the change in supply and demand, Chinese shipping companies are expected to secure long-term shipping contracts and to lower freight rates in order to obtain contracts/ cargo from European/ American automakers. What is your view on that?
A-2: In 2024 and 2025 combined, the number of new vessels in the car carrier industry is expected to total more than 100 vessels. Regarding exports from China, in the fiscal year ended March 2024, about 2.3 million vehicles were exported from China by marine transport, and the other exports were by land routes. Over 2.4 million vehicles are expected to be exported from China this year but at the present time, there is still a shortage of car carrier space, and as a result, 1.2 to 1.3 million cars are being transported via container ships or bulk carriers. With the new car carrier deliveries, a significant amount of cargo is expected to return to the car carrier market from the end of 2025 through 2026, even though it may not amount to the entire current shortage, and it will depend on container ship market conditions at that time. Amid that, we think it is natural for new companies to enter the market with European and American automakers whose contracts are due to be renewed, and we believe that this will have a certain degree of impact. At the current time, however, it is unclear what impact this will have on the market, but we can expect freight rates to settle at an appropriate level amid the overall balancing of supply and demand.
Q-3: Each country is investigating alleged dumping of Chinese manufacturers. What is your understanding of the risks associated with these investigations? Although “K” Line’s primary customers are Japanese automakers, I would like to confirm your assumptions regarding automaker production plans and trends in localized production.
A-3: First of all, regarding the trend of existing customers such as Japanese, European and American automakers, we understand many companies are planning to increase exports from 2024 through FY25 and FY26 after production constraints are resolved and securing transportation capacity is an important point.
Next, regarding the export and import restrictions surrounding the investigation into Chinese government subsidies, we believe cargo movements from China to Europe could be significantly impacted, depending on the results of the European investigation. Over the medium- and long-term, China will be able to cope by building production factory outside China. In that case, a certain amount of new alternative demand for marine transport will emerge. Even if demand for a certain part decreases due to sanctions, etc., it is expected that it will be replaced by something else, unless the retail markets change. With regard to Europe, we expect there to be local production as well as imports from countries other than China. We have incorporated risk scenarios into our plans to some degree, but we do not believe there will be a sudden and significant impact on business in FY24.
Q-4: You said previously that automobile exports from China were about 2.3 million units. China’s total transport volume is 4 million units, with a million and some hundreds of thousands of units being transported over land routes. Regarding this, please tell us whether it will be fixed to land transport or return to sea trade, and what will happen when the market levels out.
A-4: I explained that of the total export of 4 million automobiles, 2.3 million units were shipped via marine transport. The remaining volume is shipped via land routes over the Chinese border to Russia and countries in Central Asia. We do not foresee the transport method for this volume changing to maritime transport. Therefore, any changes in the trends for the 2.3 million automobiles shipped last year via maritime transport will be significant attention points.
Q-5: In discussing environmental measures, you explained that zero emissions vessels will be developed in the stage following LNG-fueled vessels. For Japanese shipping companies, I think the main options in fuel appear to be ammonia or methanol. Which fuels will “K” Line be studying for zero-emissions vessels in Car Carrier Business?
A-5: We currently have 14 new vessels on order, and all 14 of them are LNG-fueled vessels. We will study the appropriate timing for ordering zero-emissions vessels in the future. The main fuels will be ammonia and methanol. We believe that ammonia will be the main fuel used, but we have not stopped studying the possible utilization of methanol. It is necessary to consider the technological capabilities of the new ship, including engines, and the future development of the supply chain, including fuel supplies. I mentioned that there are some restraints on the ordering of new vessels from 2027 onward. One of the factors is the uncertainty over new fuels. There are some aspects of the issue on which both “K” Line and the industry as a whole are still hesitating on, and we’re waiting for some issues to play out.
Q-6: On page 8 of the materials, you introduce the unit of measure “ton days”. Please explain this in more detail.
A-6: We use this for internal analysis to indicate the number of days one car is transported. It more accurately shows demand levels. Cargo volume alone does not indicate the distance traveled. For example, the distance transporting a car from Japan to the Philippines is different from Japan to the UK. As a result, vessel utilization differs. The actual weight of a passenger car is between 1 and 2 tons. “Ton days” multiplies this by volume, equaling about 14 tons. We use this to set freight rates. Then, we multiply this by the number of days needed to transport a car, four days to the Philippines and 45 days to the UK, to arrive at an indicator of demand. Please think of it as simply multiplying transport quantity by distance traveled to indicate demand.
Q-7: Please explain what impact the traffic restrictions through the Red Sea is having on car carrier business.
A-7: Currently, car carrier voyages from East Asia to Europe are rerouted around the Cape of Good Hope. Both the dispatch and return voyages are around the Cape of Good Hope, so that rerouting extends each voyage per vessel by approximately 25 days. The voyage is slightly longer compared to containerships, and since vessels pass through the Strait of Gibraltar into the Mediterranean Sea, simple trans-shipment is not possible for car carriers, and voyages are extended. This additional voyage time of 25 days ends up draining about 7% of the total vessel supply from the market. Currently, there are about 700 car carriers available worldwide. That means that 7%, or about 50 vessels, is being absorbed simply by this rerouting. The supply-demand balance is extremely tight right now, and this is a large factor behind the tightness.
Q-8: Please explain your strategy for freight rate contracts in relation to the supply-demand outlook you explained previously. Please also explain the freight rate renewal period and other issues.
A-8: Regarding freight contracts, we will continue to discuss the future. At the current time, we are succeeding to a considerable degree in signing multiyear contracts for three to five years with customers who in the past signed for as short as one year. This reflects our high costs in securing fleet, along with the long-term commitment to transport capacity. In this way, from 2023 we have secured a large number of contracts for three to five years. For the next round of contract renewals, the market factors will include the production and export of electric vehicles, and it is difficult to forecast now where the production and export will be. There will be various scenarios possible on the customer side, and we do not know now whether customers will prefer signing longer term contracts and whether we can secure such contracts.
Q-9-1: Regarding your explanation of the supply-demand outlook for vessel tonnage, do you think there will be further tightening of the supply and demand balance due to such factors as bottlenecking at ports resulting from a lack of processing capacity or operator resources?
A-9-1: The problem of automobiles stuck at port is ongoing and growing more severe. In many regions around the world, and especially Australia and Mexico, ports have limited resources, whether it be labor, or terminal size, or a lack of trains and other transport to convey cargo inland. We believe this problem to be equivalent to 3~5% of the world’s vessel supply. As I said earlier, there are about 700 car carriers operating worldwide, so the problem of capacity shortage at ports is effectively depleting at least 20~30 vessels from the supply. Labor shortages are contributing significantly to the problem, and this cannot be solved immediately. We will monitor the situation carefully to deal with the impact.
Q-9-2: In regard to labor shortages, this problem could lead to further raising of freight rates. Have you incorporated this into your earnings plan?
A-9-2: We have incorporated many different factors into our earnings plan. We are aware of the impact of labor, and we have incorporated it into our plan as one factor.
Q-10: How does Car Carrier Business measure up against other businesses in terms of capital costs and risks? Are those higher or lower? As the executive in charge of the business, please explain how you have to manage these factors.
A-10: It depends on what you are comparing the business against. In general, however, Car Carrier Business is not a business where we can easily secure longer contracts of 10, 15 or 20 years in length. Despite that, the business requires us to utilize vessels over a long term, so compared to businesses in which long contracts can be secured, the risk is relatively high. On the other hand, we believe the return should also be high, correspondent to the risk. The current challenge is the need to completely renew our fleet by investing in eco-friendly replacement vessels. Whether or not we can gain a return correspondent to the investment is a major challenge. We have a customer base that will make it possible to achieve this. We will listen to our customers’ needs while moving ahead with asset replacement proportionate to the risk and the earnings. These are the most important points. We plan to engage in discussions with customers regarding these points.
Q-11: How do you regard the competitiveness of “K” Line’s Car Carrier Business in comparison with other shipping companies? There are new vessels being brought into service by Chinese companies, so please explain your management approach.
A-11: Building trusting relationships with a limited number of customers is very important. It is particularly important for shipping companies to collaborate closely with customers in moving ahead with investment in eco-friendly vessels. Without that, it would be difficult to make progress and our customers would have difficulty securing fleet assets to support their decarbonization and emissions reduction efforts. We have been in this business for a long time, and we believe we have a very strong customer base including Japanese, European, and American customers. I do not think we are subordinate to any other shipping companies in the car carrier business. There are currently about 700 car carriers operating in the world, and “K” Line operates 82 of those. We have assigned most of our vessels to the Pacific Ocean and Atlantic Ocean shipping routes, reflecting our long business relationships with Japanese and other East Asian customers as well as with European and American customers. This is a major differentiating factor for us. As a result of this track record, we can strengthen connections with customers when discussing new eco-friendly vessels, H&H cargo, new networks, or new cargo movements. We are confident that efforts on these initiatives are progressing.
Q-12: Regarding your supply-demand outlook for car carriers, how are you incorporating the situation in the Red Sea into your forecasts? Are you assuming the current situation will continue or are you expecting the situation to normalize?
A-12: Our supply-demand forecast assumes that the Red Sea will remain closed to traffic through FY24. However, we are also assuming the Red Sea will reopen to traffic in FY25 and we have based our supply-demand outlook on that assumption.
Q-13: On page 13 of the briefing materials, you state the carbon costs as $100/tonCO2 when the simple levy system is introduced, rising to $200/tonCO2 when the system is strengthened. Are these “K” Line’s assumptions or are the figures based on some industry rule that has already been established?
A-13: These are based neither on our internal rule or an external rule. They are simply our assumptions. Currently, in the EU, the price in the emissions trading system is 70 euros per ton of emissions. That is one indicator we used as a basis for our assumptions. So we have indicated the late 2020s and the mid-2030s as times when the simple levy system could begin. These are our assumptions, and the actual timing could be earlier or later than this. On the other hand, if these levies are weakened, then the retirement of older vessels emitting large amounts of CO2 will be delayed, and international rules will have little meaning. The discussions at the International Maritime Organization (IMO) and other organizations will have a large effect on how these issues develop. However, nothing has been decided as of now.
Q-14: Could you comment on the potential hazards of transporting electric vehicles? Is it more hazardous to transport gasoline and diesel vehicles, or is the level of danger basically the same? Are the transport issues largely the same, for example when considering insurance and other factors? Please explain the differences.
A-14: Simply considering the potential of a fire outbreak, and whether it is higher or lower for electric vehicles, we do not believe there is a difference between gasoline vehicles and electric vehicles. However, once a fire does occur, it is more difficult to extinguish a battery-related fire. To put it another way, when a fire occurs, if appropriate measures have not been taken, then there is the danger that a fire will burn out of control. So it is important to detect signs of potential outbreaks early, and take measures to ensure that the fire does not occur. These measures are no different than before, but today, measures are being taken on vessels both to enhance personnel and the vessel facilities where necessary. Of course, there are fire detection devices installed on vessels now. Besides that, the industry is studying the use of cameras, heat-sensing lasers and other technologies. It is important to make efforts to ensure that fires never occur by improving the technologies and taking measures to detect and respond quickly to problems. Other companies also have issued various guidelines and the EU has come out with initiatives. In Japan, the Ministry of Land, Infrastructure, Transport and Tourism is taking the lead in researching fire prevention measures, joined by three Japanese shipping companies, and we expect rules to be issued in the future.
Q-1: Coal & Iron Ore Carrier Business typically secures longer contracts, and therefore the risks are lower when compared to Car Carrier Business. Is the profitability also comparatively low? I think the contribution to earnings is small because you are securing contracts with low earnings, but please comment on the scale of the business in relation to earnings.
A-1: Dry Bulk Business has a variety of contract formats and players. Our policy is to increase business earnings by focusing on stable profits based on our customer base, and by appropriately capturing profits through market-linked earnings. There are many types of customers, shipowners, and operators. We both charter in the vessels and charter out the vessels, and we have relatively more opportunity to develop a fleet of our choice while properly controlling risks. In this way, we can manage our business by balancing cargo and risks. In regard to earnings, we are firmly focused on securing medium- to long-term contracts with core customers, and using the stable earnings as our foundation. In addition, in order to transport customer cargo, we own and operate market-linked fleet as necessary. We manage the business in this way to generate further earnings and realize the potential upside of profit in order to make contributions to the company’s overall earnings.
Q-2: The profit margin for Dry Bulk Business is disclosed, but I do not think it is regarded as a high level. Please explain what you believe would be an adequate profit margin for the business. Please also explain the profitability of only Coal & Iron Ore Carrier Business, not including small- and medium-sized vessels in this segment.
A-2: As we explained when discussing the company’s overall investments, our stance is to maintain investment discipline while seeking returns. In FY23, our earnings were below expectations. However, market conditions fluctuated during the year, and there were a number of one-time factors that accumulated to undercut earnings. These factors will fade away in FY24, so we expect a rebound during the year. The global supply of large Capesize vessels is said to be about 1,800 vessels. More than one-third of this supply was completed and entered service around the 2008 global financial crisis. Looking back at the market’s recent history, basically the oversupply problem has continued, despite some phases of temporary supply-demand balancing. However, in the medium term, the market is headed towards a supply-demand balance due to these vessels reaching retirement age around 2030. Then we can expect a firmer market. Amid these developments, we will continue to take steady measures to secure solid returns in our business.
Q-3: The profit margin for Dry Bulk segment was 1~2% prior to COVID, and there were also some losses. During COVID, when the market experienced unique circumstances, the margin rose to 7~8%. For the current fiscal year ending March 2025, do you forecast maintaining or expanding the margin afterwards?
A-3: We want to increase profitability towards 2030. We believe there will be three factors that support higher profitability. First, we plan to expand our stable earnings business with an emphasis on environmental measures. Second, we plan to raise our competitiveness by utilizing long-term charters and upgrading the fleet to state-of-the-art vessels with better fuel efficiency. Third, we plan to raise our connectivity and strengthen our earnings ability by taking advantage of expanding business opportunities in India and other regions.
Q-4: Regarding the Capesize market, please explain how “K” Line is more competitive than other companies. In terms of your fleet size and customers, it seems “K” Line is similar to other Japanese shipping companies. But when you compare yourself with non-Japanese shipping companies, what kind of presence does “K” Line have in the market?
A-4: In the Capesize market, there are just a handful of shipping companies operating fleets in the 80 to 100 vessel range. Each shipping company has its own management style. We are focused on stable earnings business backed by medium- to long-term contracts, primarily Japanese and Korean companies, but also including Indian and Middle Eastern customers. In addition to this business foundation, we supplement earnings with market-linked business. This business approach and balance make us competitive compared with other companies. We do not believe we are subordinate to other shipping companies.
Q-5: Regarding the Capesize exposure ratio, the financial announcement materials state that the ratio at the beginning of the fiscal year was 15%. I believe this ratio changes each year. Would you like to see a higher or lower ratio? What is the optimal ratio?
A-5: We have not set a clear KPI regarding the ratio of exposure. But as a target, 15% represents a level to which we can manageably lower the ratio. At last fiscal year’s business briefing, we explained that the exposure ratio at the beginning of the year was 23%, and this year the ratio has declined to 15%. As explanation, the ratio was affected by certain factors before we completed the matching of vessel type and the length of cargo contract. There were short-term contract renewals during the second half of FY22, when the market conditions were very weak, which made it difficult to lower the exposure ratio in the last fiscal year. Contracts were renewed in the second half of last fiscal year, when the market conditions stabilized and improved. That made it possible to manage the exposure to the target level in this fiscal year.
Q-6: Please explain the changes that have occurred internally at your company over the past few years in terms of cargo and charter optimization and risk management controls.
A-6: We improved the indicator from 20ppt in FY22 to 18ppt in FY23. Moving ahead, there will be redelivery of long-term chartered vessels and the replacement of short- and medium-term charters and we aim to improve the rate further to 5ppt in FY26.
Q-7: You explained that demand for eco-friendly vessels has been delayed somewhat, but that over the medium- to long-term, demand is strong. Please explain the background to this trend further.
A-7: The demand for alternative fuel vessels driven by environmental demand is emerging later than our forecasts, which estimated demand to materialize during the current Medium-term Management Plan. As background to this delay, the final direction for environmental measures and the direction of regulations are still unclear on some points. Furthermore, one of the end goals is to develop zero emissions vessels. However, the outlook for new fuels for these vessels is still unclear. Additionally, our customers themselves have various issues that are causing them to postpone plans. At the IMO, the Marine Environment Protection Committee (MEPC) has yet to make a decision on details of regulations on global emissions. The committee is, however, moving towards their introduction. Once it officially introduces the regulations and sets a price on CO2 emissions, then it is expected that LNG-fueled vessels and the following generation of zero-emissions vessels will be competitive in terms of market conditions and price. Therefore, we believe there will be shift in demand sooner or later at the right timing.
Q-8: When you discussed environmental measures, you said that one of your goals is to raise “K” Line’s share of business among major resources companies. Please explain the background. I believe other shipping companies have the same goal. As for your goal of raising your share, do you mean that your goal is to raise major resources companies’ proportion of your business over the medium to long term? Or do you mean that, for other reasons, you are seeking to capture a higher share of the major resources companies’ business? Please explain in more detail.
A-8: Among the major resources companies we target, a very high percentage of our business with them consists of short- and medium-term contracts. In the shift to future eco-friendly vessels, the costs will rise in comparison with standard vessels. It will become necessary to lengthen the charter contracts in order to manage costs. This situation is already beginning to develop. We believe this shift to eco-friendly vessels will increase the opportunities for us to secure long-term contracts with major resources companies and other customers.
Q-9: Please explain the background to “K” Line being chosen as a partner of Anglo American.
A-9: From 2015, we have collaborated with Anglo American in a joint-venture concerning South African-registered vessels, though the size of the venture has not been large. We believe this approach is one effective way of developing business. Additionally, as we have strengths in cargo shipments to India and the Middle East, and Anglo American is focused on shipments from South Africa and Brazil, we were able to leverage our connectivity to gain business for Anglo American’s cargo shipments.
Q-10-1: I understand that reduced iron is produced through an ironmaking process that uses natural gas and hydrogen. Could you comment on the operations aspects when transporting reduced iron, as well as the earnings of the business.
A-10-1: We believe reduced iron transport demand will increase in the future. The demand for reduced iron will emerge from iron manufacturing companies as well as from projects involving peripheral companies. We will enhance our customer-oriented approach and solutions capabilities to secure transport demand.
Q-10-2: When you begin full-scale transport of on a commercial level, do you expect to use large Capsize vessels or Panamax and smaller sizes?
A-10-2: At the current time, due to the qualities of reduced iron, we plan to transport the material via Panamax and smaller sizes.
Q-1-1: Can you please explain how your profits will grow as your LNG carrier fleet expands. I have heard that while LNG carriers provide stable earnings and margins are steady, in general, profitability is low in the initial stage of contract due to upfront costs such as interest expenses, and in some cases there is a possibility of losses.
In its business plan, “K” Line will increase and expand the number of LNG carriers rapidly over the next few years. As you execute this plan, what kinds of upfront costs will be incurred and how much impact will these costs have on your ordinary income?
A-1-1: In regard to the LNG fleet and our earnings, as you pointed out, the earnings at the launch of business are lagging and materialize in future years. There is such tendency due to the delivery timing to consider and the gradual increase in operational days for the vessels. On the other hand, our investment standards are quite strict and we are stringent about adhering to them. Over the past decade or so, the LNG transport business has not experienced a loss. In the current investment plan, we are strictly following our internal standards and making investments and managing them according to those standards. Furthermore, in regard to projects we have joined, the amount of stake we have in the newer projects is increasing. In more of our joint projects, we are the main operator, and this enables us to generate more profit from each project. In this way, our returns on business are expected to be higher than the increase in the fleet.
Q-1-2: Please explain exactly why your stake in these projects is increasing recently. If “K” Line has more than a 50% stake in a project, then I believe you would essentially be the operator of the project. Please explain why this has become increasingly possible in recent years.
A-1-2: Typically, the LNG business model is to form a consortium through which we take part in various projects with other companies. In the early days of the LNG transport business, there were many projects in which the three major Japanese shipping companies would join the consortium. In those schemes, we took a share of the projects based on the number of vessels we owned and our capabilities. In recent projects, however, we have been able to demonstrate our leadership and proactively hold discussions with a wide range of partners. In light of those changes to the business format, we are taking a higher stake in projects.
Q-2: Please comment on how changes in the trading of LNG will impact shipping companies and LNG carriers. In the past, the industry had what were called “foundation buyers.” LNG projects were launched by signing trading contracts of 20 years or so with these buyers. Recently, the ratio of such long-term contracts has declined, and there are more portfolio players and companies adding LNG trading to their business, trading dynamically by selling to utilities, for example. In this way, the traditional LNG business model is less common amid changes to LNG trading contract types and such other factors as the rising weight of business in North America. What kinds of effects will these changes have on “K” Line’s business? Will there be any impact at all?
A-2: There have been examples of projects in which traders and other players have joined LNG carrier procurements and placed orders without contracts speculatively. However, in regard to contract format, the market is becoming more polarized between longer and shorter contracts. Not all of the projects have become shorter term. Especially since Russia’s invasion of Ukraine, the shorter-term contract trend has eased and more contracts have become traditional longer-term. Recently, there is an increasing number of large-scale projects that involve long-term contracts, so we think the market will be comprised of a combination of long-term and short-term deals. However, we will continue our basic policy of focusing on long-term stable projects.
Q-3: You have updated your Medium-term Management Plan, and the Energy Resource Transport segment’s ordinary income forecast for FY24 is 5.0 billion yen, and rising to 10.0 billion yen in FY26. In the briefing slides you presented earlier, it appears that the ordinary income for only LNG Carrier Business is expected to be flat from between FY24 and FY26. Is it correct to understand that even though the LNG fleet is growing, the business does not contribute to earnings in the early stages of a project, as you explained? If earnings are not growing in LNG Carrier Business, which business in the Energy Resource Transport segment will generate earnings? Furthermore, your forecast shows ordinary income growing from 10.0 billion yen in FY26 to 20.0 billion yen in FY30. It appears from the briefing materials that almost all of this growth is expected to be generated by LNG Carrier Business. Is it correct to understand that LNG Carrier Business will generate the increase of about 10.0 billion yen in profit around FY30?
A-3: We have not disclosed earnings for each individual business within the segment. For LNG carriers, there is a slight time lag for profits to start accumulating after delivery of the vessels and the contribution from the new vessels after FY26 is expected to be much greater than the contribution through FY26. Additionally, for the Energy Resource Transport segment as a whole, we are taking other measures than LNG carriers to increase earnings. These include replacing tankers and thermal coal carriers with new highly efficient vessels, as well as expanding business on the periphery of the LNG value chain. As you pointed out, the weight of LNG Carrier Business in the FY30 ordinary income is large, but we plan to achieve our plan through the combined earnings of businesses in the segment.
Q-4: It is said that LNG is an intermediate fuel solution to the end goal of zero-emissions vessels. In that regard, do long-term contracts assume that the LNG carrier will be used to the end of its useful life to service a contract, or is there a possibility that during the contract, a vessel will be replaced with a newer one, which can use a different kind of fuel as well? Other companies take these types of measures, and I would like to know how LNG carriers are used over the long term of their service.
A-4: Regarding LNG carriers, the LNG cargo tank has a very long lifespan. Physically, it can be used for a very long time. In general, when we secure a long-term contract, we plan to use a vessel for a long period of time in service of the contract. Once the contract is expired, there are various ways to reuse old vessels. For example, we could use the vessel to service short- and medium-term contracts. Or we could refit the vessel to be used for FSRU, depending on the market conditions, as an example of LNG-peripheral businesses. There are some overseas investment companies and some shipowners that make vessel orders without contracts or speculative orders of vessels. These operators have shorter rather than longer business plans, and they may consider selling vessels. But such resale market for LNG carriers has not been established yet. These types of vessels typically do not become available in the market.
Q-5: Regarding the investment return for LNG Carrier Business, how do you go about evaluating whether the investment is good or bad? You mentioned previously that you are using very strict investment criteria, but could you comment further on exactly in what ways they are strict? When you consider the need to counter-balance the capital costs and generate a return equal to the capital costs, or “K” Line’s ROE, it would appear that you need to use significant leverage to meet the standard. Additionally, if you make a decision based on securing long-term contracts, and you no longer need to consider the risks, then you would appear to need to secure more contracts to make up for the fact that the risk and return are low. Please explain the standards used to decide if returns are sufficient in the management of the business.
A-5: Regarding our investment discipline, we pursue projects whose equity IRR is above the hurdle rate for investment. I will refrain from more detailed comments on the exact figures we use. Suffice to say that in maintaining investment discipline, our company pursues projects whose ROIC exceeds the business WACC. We generally do not pursue projects whose return is low. Recently, amid greater demand for LNG, we have recognized that earnings on projects are meeting a certain level.
Q-6: In regard to LNG carriers, I do not think the shipping company actually owns the vessels but do you control risk taking by choosing whether it is off-balance sheet or on-balance sheet?
A-6: In most projects, project finance is secured and the carrier is managed as an off-balance-sheet asset.
Q-7: Please explain further about LNG carrier construction. As I understand it, Japanese shipyards no longer build many LNG carriers. What is “K” Line’s view of this trend, given your position as a vessel operator? I think that Japanese shipbuilding offers more advantages for Japanese maritime clusters in general, but please explain how you think including whether the lack of Japanese-built carriers has any impact on competitiveness etc.
A-7: As you noted, Japanese shipyards no longer build LNG carriers inside Japan. Originally, carriers were built by specialized heavy industry shipyards. For us, there was some peace of mind in having carriers built domestically. However, there was intense competition with Chinese and Korean shipyards, and now about 90% of carriers are built in China and South Korea. Additionally, in some of the LNG carrier transport contracts, the project owner specifies the shipyard to be used. As a result, we have developed closer relations with Chinese and Korean shipyards, and going forward, we will use vessels built there.
Q-8: What is your stance on FSRU and other businesses on the periphery of the energy industry? I understand that LNG shipping is your main business. In the past several years, however, FSRU has developed into a promising business of its own. Despite that, it does not appear that Japanese shipping companies have made much progress developing the business. What is “K” Line’s stance on other energy-related businesses, centered on FSRU?
A-8: We are pursuing various opportunities in peripheral businesses related to energy. Within the energy industry value chain, there are a variety of businesses, and even among the businesses closer to the upstream, FPSO and FSRU are different. We are generally not pursuing upstream business. To the extent possible, we are focusing on peripheral business that is closely tied to shipping business. We have had discussions regarding FSRU projects. Aged LNG carriers can be refitted for use as FSRUs, and this type of business is different from other types of upstream business requiring difficult operations. Given that, if projects clearly meet our standards for profitability, then we will steadily build the business.
Q-1: Please explain exactly what areas of the CCS business you are pursuing. You said earlier that you are studying both transport and storage. Will “K” Line also get involved in the CO2 liquification processes?
A-1: Our territory is basically marine transport. In the storage and liquification areas, there are other specialist companies. We plan to partner with these companies and pursue projects through alliances that can build a CCS value chain.
Q-2: Please explain the technical aspects of CO2 transport vessels and the level of operational difficulty. My understanding is that LNG is liquified methane cooled to minus 160°C, while hydrogen is liquified to minus 250°C, and CO2 is liquified to minus 56°C. Simply understood, it would appear that because of the relatively high liquification temperature, CO2 is easier to transport. Can you comment on this?
A-2: Regarding the difficulty in operating liquified CO2 transport vessels, it is very similar to transporting LPG and ammonia. The liquification process involves medium temperature and pressure, cooled to minus 20°C at a pressure of about 2 megapascal. This is very similar to the specifications for LPG transport. One of the special characteristics of liquified CO2 is that it could change into dry ice. Once it turns into dry ice, the cargo loading/discharging should be suspended. It also cannot be turned instantly back into liquified CO2. Therefore, the technical know-how and monitoring involved in the pressure and temperature control are very important.
Q-3: Please discuss your front-running experience in Europe. When you consider that you are transporting CO2 to another country, then it would make CO2 a kind of unwanted, nuisance cargo for the storage country. This is also true of the Northern Lights project. In that sense, people in the industry have indicated that the business may have some negative effects. Additionally, if Japan begins to develop a CCS project, it is likely that CO2 will be stored not only in Japan, but in Southeast Asia and other regions. I understand that there is some debate about whether it is appropriate for Japan to impose this burden on other countries. Are you aware of any negative consequences surrounding CCS transport initiatives underway in Europe, including the Northern Lights project? Conversely, do most people view decarbonization and reduced emissions as a priority, and the initiatives are progressing smoothly? What is your understanding of the social reaction to CCS?
A-3: As you pointed out, there is a perception of CO2 as a burden. Transport of these types of cargo is regulated by the London Convention. This convention prohibits the export of waste to other countries. However, the convention allows for exceptions in cases where two countries make a bilateral agreement. Norway, which is accepting the import of CO2, has made bilateral agreements with the Netherlands, Denmark and other countries. In this way, the regulatory infrastructure for enabling exports of CO2 is in place in Europe, where initiatives are progressing.
There are several requirements that need to be met before CCS can be realized. One of them is securing bilateral agreements that ensure there are available storage sites. A second requirement is carbon taxation systems. And a third is government support. Overall, these three requirements need to be in place before CCS can proceed. With regard to Japan, none of these requirements has been met. A bill called CCS Business Act has been approved by the Japanese Cabinet. The Japanese government is making progress on forming bilateral agreements with Australia, Malaysia, and Indonesia, candidates for CO2 pressurized injection sites. But no agreement has been finalized with any of those countries. Therefore, regarding the potential negative influence of this business, Europe is a forerunner in solving these issues, followed by Japan and other Asian countries.
Q-4: How does “K” Line see CCS in Japan? I understand CCS feasibility tests have been conducted in Tomakomai, and there are some depleted oil/gas fields and aquifers. Does the fact that “K” Line is considering transportation mean that it would be difficult to do CCS storage in Japan? Given a timeline extending to mid-2030s, do you think it will be possible to conduct CCS operations in Japan?
A-4: As Japanese Advanced CCS Projects led by the Ministry of Economy, Trade and Industry, seven projects were adopted last year, and these obviously include storage-related projects in Japan. There are also projects being conducted outside Japan at the same time. One of the key issues is where to store CO2, and there are connections between these domestic and overseas projects in this respect. Viable storage sites include depleted gas/oil fields and aquifers. As explained, depleted oil/gas fields are particularly remarkable because they have been preserved intact for hundreds of millions of years. They have survived earthquakes and volcanic activity, so even after used as oil/gas mine, there is considered to be a high level of reliability for using them as CO2 pressurized injection sites. There are a limited number of such oil/gas fields in Japan. If Japan is to achieve a net-zero society, then given the amount of CCS to be stored, storage sites outside Japan must also be considered. To make progress on this issue by working in collaboration with the Asia-Pacific region, Australia, Malaysia, Indonesia and other countries, Japan will need long-distance transport solutions not like the short-distance transport solutions in Europe. We basically plan to support the transport part of the value chain as this chain becomes established. For value chains established in Japan, we will work on them through partnerships with Nippon Gas Line, which we explained earlier, and in the case of projects outside Japan, we will leverage our know-how and take a flexible approach to business development.
Q-5: Your presentation explained the focus on CCS business, but given the relatively low ordinary income contributions of 3.0 billion yen and 5.0 billion yen after 2030, it is doubtful that this represents a significant business for “K” Line. Of course, if there were 10 businesses of the same size, that would be a different discussion. In light of this, please explain in more detail the positioning of the CCS business, as well as new businesses besides CCS, and how you plan to launch new businesses overall.
A-5: As you point out, the CCS business will be driven by European initiatives and expand outward gradually after 2028, so we expect the wave to reach Japan around 2030. Therefore, from purely a profit contribution viewpoint, we can expect the business to generate profits from 2030 onwards. In other businesses, ammonia transport is expected to materialize from around 2028. Offshore wind turbine support vessel business is expected to begin a little earlier, around 2026 or 2027, and projects in Japan are forecast to begin operationally around 2027 or 2028. Given those timelines, projects for emission reduction and decarbonization are expected to make profit contributions from 2027, and mainly from 2030 onward. These types of businesses will continue to emerge, however, and we will keep up with them from a medium- and long-term perspective.
Q-6: When discussing emission reduction and decarbonization, generally speaking there are new businesses emerging and other businesses disappearing or getting smaller. For example, I think it is possible that the environmental trends have a negative impact on your Dry Bulk Business. For example, even if there are negative factors for “K” Line’s profits, what kind of discussions do you have internally regarding overall issues such as using positive factors to increase profits?
A-6: There is an issue how our company should work on businesses that will decrease or, conversely, increase as the movement towards emission reduction and decarbonization progresses. Overall, however, we forecast the volume of global trade, and in terms of the energy related, electricity demand to continue growing. Amid these overarching trends, businesses will come and go. As mentioned in Car Carrier Business and Coal & Iron Ore Carrier Business presentation, fleets will undergo upgrades to eco-friendly vessels, while the kinds of cargo we transport will change, and fuels used to power vessels will be replaced. There are many factors to consider. We hold regular discussions on these issues and we make decisions after comprehensively taking all factors into account. In this way, we will review issues continuously as the trends in the industry are always changing, and the speed of progress often changes as well. We will continue discussions and take action so that we are not left behind.
