Major Q&A during the Analyst Meeting for 3rd Quarter Fiscal Year 2007

(Containership Business)

Please advise your view for Fiscal 2008 (April 2008-March 2009) containership market supply-demand trends for both Asia-Europe and Asia-North America trades, together with your own vessel capacity expansion plans.

Regarding supply and demand situation for Asia-Europe trade, consensus per discussions in our industry group is that cargo volume growth for 2008 will slow somewhat compared to 2007 by around 15%, or slightly over that.
On the other hand, vessel supply increase has been calculated at over 20% by simple arithmetic on the basis that all newbuildings to be delivered are going into additional service loops operated in traditional style. However, these days many shipping companies add one extra ship to existing loops to save bunker oil consumption by way of speed down while keeping service frequency. As a result, we do not expect total space in the market will actually grow over 20%, so supply-demand balance should not be disrupted.

Our own loading capacity in Asia-Europe trade is scheduled to increase by one additional string of 8,000 TEU-type ships operated jointly by ourselves and one of our partners, Yang Ming Marine Transport Corporation of Taiwan, which will be newly-delivered one-by-one and so will not raise our handling volume instantly, but just gradually. When we receive all of these 8,000 TEU-type new ships, and since we will utilize about half of their total space, our cargo volume will be extended by around 4,000 TEUs per week, approximately 30 to 40 % of present amount, which will become fully available from the year after next.

As to Asia-North America trade, at present we do not see substantial cargo growth in view of total market trend for next year, and so we "K" Line will not increase our own space, just maintain current level. In some situations, we could even reduce our space slightly in cooperation with our Alliance members.


Taking prospects for freight rate market of Asia-Europe routes, where you had succeeded in rate restoration several times within last year, please give us your comment whether you will really be able to achieve further rate up in coming fiscal year, considering results of this January's rate negotiations.

Although our industry group for Asia-Europe trade had scheduled freight up effective from this January and we successfully improved the rate in renewals of one-year contracts starting from January, we cannot say freight rate except for one-year contracts has increased materially, which partly depends on cargo movement momentum from now on. For next fiscal year, I suppose we can secure further rate increase at least at a level that just covers cost up, especially due to fuel oil price hike.


According to what you now said, it sounds like the only increase you will be able to achieve in Asia-Europe trade freight rate negotiations will not be more than almost equal to the soaring bunker oil cost increase; so let us confirm whether present bargaining is proceeding under the condition that any cost-up factors other than fuel will not be compensated in anyway.

As to the negotiation with our customers we are not requesting compensation directly linked to fuel oil price rise. We just expect total rate improvement will balance the increased fuel expenses as a result, which is not necessarily equal to fuel costs.
We can offset some of the other cost items with our own saving efforts. Therefore, if total freight rate increase matches the increased costs from bunker oil our total profit from containership division for next fiscal year would not worsen from this year. Though we will never be completely satisfied with that level, we hope we can raise the rate at least to the degree.


Indicated in this 'Supplementary Report' slide 1-1, "K" Line's loaded volume growth for this 3rd Quarter in Asia-Europe trade shows slight slowing down in year-on-year comparison, and loading factor also lowering below last year's level so that your share in Asia-Europe route is down. Please explain background for this situation and any particular reason, if any.

The reason why our handling volume declined in Asia-Europe trades for this 3rd Quarter is supply-demand balance that deteriorated especially in the Mediterranean Sea route with its overall market trends due to vessel increase because many shipping companies shifted their fleet from services for North America where cargo movement has not recently been positive. As a result, considering our freight rate level, some of our customers reduced cargo volume given us to some extent.
In our services for northern part of Europe (U.K., France, German, and the Netherlands) we have also experienced slight cargo decrease because of total vessel capacity increase there, too.


Now while bunker oil price has been hiked, please tell us your actions against that; for example, in case of containerships, how to collect fuel surcharge, or navigation with reduced speed, etc. In addition, would you also advise your means to counter any rising ship costs (maintenance costs, crew costs, etc.)?


The only counter measure to rising costs is to raise freight rates, or to make every possible effort to stop further cost increase.

Regarding methods to save bunker costs for containership business that is affected to the greatest degree by bunker oil price hike because vessel-wise consumption is the biggest in order to navigate with highest speed of 25 knots, as I mentioned before (in the presentation), we are investigating various ways by ourselves or with our Alliance partners.

For example, we might eliminate one loop in Asia-North America trade depending on conditions because cargo flow there is probably not prospected to grow notably during next term. Or, by way of bringing two individual strings separately operated in each of our Asia-North America and Asia-Europe trades into one 'pendulum' service, we can save total voyage distance significantly; i.e., due to cutting off the overlapping route to make allowance so that daily navigation speed can go down to decrease bunker costs.

In fact, these costs are partly diminished with ships' size-up, which is common among various cost items. For instance, crew expenditure is almost equal even if bigger or smaller vessels because both require 22-3 crew as same. In case of containerships, when we started to use 8,000TEU (containers) type ships instead of 5,000TEU, cost per container is significantly decreased.


As for your containership fleet size-up, in fiscal 2008 ending in March 2009, only one 8,000 TEU-type ship is scheduled to be delivered. Looking back at this fiscal 2007, you must gain some fruits from cost saving due to new 8,000 TEU-type fleet you had received within the previous year even though you received only one 8,000 TEU-type in this fiscal 2007. However, for fiscal 2008, may we understand that you have to give up cost saving from the size-up one time, and then for fiscal 2009 you can again secure some cost down from 3 new 8,000 type vessels and one 6,400 type?

In case of us, "K"Line, as we have formed an Alliance with several partners, we can utilize not only our own fleet, but that of our partners as well. For example one partner will start deploying new 8,000TEU type ships from this spring, and we will share a part of them.
In this way we will be able to achieve unit cost down even without our own fleet. Though our new 8,000 TEU-type ships are debuting one-by-one from the end of this year to next year, such curtailment effects start from the beginning of the partner's fleet delivery within fiscal 2008.


(Other Marine Business)

Dry Bulk Carriers

Assuming present exchange rate and bunker oil price holds throughout next fiscal year, please comment how much dry bulk market level is required to maintain almost same Ordinary Income as this year, even as just your present personal feeling.

Very roughly estimated, even if average spot market rate for cape-size, a large-size bulker, is under 100,000 U.S. dollars per day, or even around 90,000 dollars maybe, I suppose our dry bulk division could earn almost same profit as this year. Based on this cape-size freight level, maybe Panamax, middle-size bulker market should be, say, 50,000 dollars a day, or around 45,000 dollars, though it is very difficult to estimate exactly because of different 'free' portion for each type.

For guidance, when you look at dry bulk business, you should note that once market price is determined for a business, fuel oil price level has been reflected into the rate. It is not the same as with containership business in which bunker oil cost still fluctuates after the freight rate is fixed. In case of dry bulk division, when fuel oil price is up, maybe about 20-30% of the cost up would affect its profit. In this regard, fuel oil hike is not so severe a problem, contrary to your expectations.


Now we have heard in case average cape-size market level is around 90,000 U.S. dollars a day throughout next fiscal year, profit from your dry bulk business will be almost same as this year. Because you forecasted the average rate level for this year at approximately 115,000 dollars per day, I understand even if the average rate goes down by 25,000 dollars a day, you can still achieve almost the same profit as this year.

In case the freight market during next year actually becomes 90,000 dollars daily in average, please advise how you can make up the drop.
As I understand that there are various factors such as business expansion with additional long-term contracts for newbuildings, or revision of existing mid-term contracts made at a time when market level was still much lower than nowadays, say, 3 years before, or so, would you comment on your image for breakdown of such improvement factors?

There are two major factors: one is effect of business expansion by newly-built vessels, and another is renewal of contracts with better conditions, which had been previously made in the past when the market level was rather lower.


Would you explain about present and future impacts that you now prospect in dry bulk market from various problems reportedly caused at ports in Brazil and Australia?

In Brazil, one problem for shipping iron ore is said that some shippers withhold their cargo until price up to be effective from April, and another is where a loading facility is physically damaged to delay shipping.
Furthermore, in Queensland, Australia, they cannot export coal due to flooding and shipper has announced 'force majeure'. As these troubles caused recent market level to fall from last peak, I suppose fundamental demand remains very strong.

According to news released yesterday (31 January) that Bao Steel, China signed a 10-year contract of affreightment with BHP Billiton to purchase about 10 million tons of iron ore per year, almost 100 million tons in total during the 10 years, dry bulk freight market jumped up. I suppose present market could leap responding to positive factors like this. Though I had felt like market would continue slack until effect of the Chinese New Year holidays (6-12 February) ended, market started to climb up beforehand faced with this circumstance.

As the market I have touched on now is cape-size market, the ones for smaller size vessels have been going upward following cape-size.

As to troubles at loading ports, apart from natural disasters, artificial affairs would not take so much time to be settled, and so the market will not be significantly influenced in the next fiscal year. Instead, after a part of cargoes they need is held, I wonder if demand in next year will be sharply increased, and another big wave might be coming.


Please let us know estimated average ratio of so-called free portion of your dry bulk fleet during this fiscal year, and also your idea about the ratio for next year.

In general, the ratio is roughly 20-30%, which is our policy. It is higher for smaller ships than for larger ships. Though I do not grasp the rate just at this moment, at the beginning of this fiscal year, it should be about 30%.


Car Carriers

You said intra-Europe car transportation was strong and your handling volume there increased while vessel capacity was short in your overall service, which looks like a kind of fetter for you. So, will you please tell us the reason in more detail why you have aggressively taken a risk to enhance intra-Europe trades now?

The intra-Europe service partly forms one end of service from Far East Asia, mainly Japan, to Europe, but basically self-contained within Europe, and is profitable business in itself. In addition, our operating vessels within Europe area are smaller types, so even though our capacity is quite short in Pacific area at present, there is no economic rationality to let small PCCs enter into such long-haul route like trans-Pacific from intra-Europe area.