Q.1 With regard to fleet reduction plan in both Asia-North America and Asia-Europe trades, how much of your fleet are you planning to reduce? How about total fleet for the entire industry?
A.1 As to updated status, according to data about 1 week ago, about 380,000 TEU, slightly over 2.5% of total capacity in overall containership industry has been laid up or idled. From now on, I suppose it might reach around 10%, including vessels being tentatively idled. As to total for CKYH Green Alliance to which we belong, we will decrease about 3 services from 19 to 16 per week for Asia-North America trades, and from 9 services to 8 or 7 services for Asia-Europe/Mediterranean trades, a total of 10-15% reduction.
Q.2 As you said freight rates will be restored from 4th Quarter, what is the reason that the rate will not increase before 4th Quarter?
A.2 Every year, before Lunar New Year Holidays, cargo volume shows significant growth, a situation in which we empirically anticipate achieving freight restoration. So we are hopeful we can succeed with some rate restoration at that time, and same situation anticipated for next year after the global financial crisis.
Q.3 Unlike the critical financial period just after the global financial crisis, I suppose the recent cost structure for many containership companies has been changing with the introduction of many gigantic containerships. How much can you make freight rate up in these circumstances from now on?
A.3 From 4th Quarter we expect some freight rate restoration in routes from Asia to North America, and to Europe, also for a part of intra-Asia services. However, it is quite unlikely the rate will jump as much in this 4th Quarter as was the case in 1st Quarter 2010 just after the financial recession, which is not expected to happen before economic conditions in the U.S. and Europe regain strength and cargo volume shows firmer growth.
Based on our trial calculation, spot freight level for Asia-Europe trades fell almost to a break-even point. Of course each shipping company's average freight rate might be different, but we are sure that everyone is facing a considerably severe situation.
Because present spot freight rates are at such a severe level whereby no one can survive if they continue, and since cargo volume is expected to increase significantly before Lunar New Year Holidays, we anticipate freight rate levels will see some restoration from the 4th Quarter.
[Dry Bulk Business]
Q. Let us know your view about crude steel production in China, as some people have started saying it will slow down in the near future.
A. Chinese crude steel production has been at least about 700 million tons per annum basis for this year, which is 15% up from last year.
Major part of present dry bulk market is definitely dependent on China, but crude steel production in India also grew by 8% in 3rd Quarter for year-on-year basis, and 21% in Korea whereas average growth globally is 11%. So China is not the only factor, which is one thing I would like to point out.
Then, when asking the Chinese or our representatives in China, their views are not pessimistic, even if economic growth is not as strong as it has been up to now, partly because they still have to develop industries and infrastructures, especially in inland areas. The momentum will not be so enormous, but they cannot hit the brake hard in this situation for which we currently have some expectations.
And I should also mention that production of iron ore in Australia and Brazil has also grown by approximately 11% in the 3rd Quarter as well. So global production growth ratio of crude steel and that of iron ore are corresponding, which would of course be partly affected by price trends. Therefore, I feel the situation might not be so serious for the time being.
[Car Carrier Business]
Q. How many cars do you expect to carry during the 2nd Half?
Please also advise whether you include any damage from recent flooding in Thailand.
A. Loading volume for our Car Carriers in this 2nd Half is expected to be around 3 million cars except for intra-Europe service, roughly 1.5 million in each 1st and 2nd Half, respectively. However, in the 1st Half total cars loaded was reduced because auto manufacturers' production was interrupted by the Great East Japan Earthquake, but the reduced portion should be recovered in the 2nd Half.
Impact of the recent severe flooding in Thailand is not included in this forecast, but we planned to load around 100,000 cars in Thailand during this 2nd Half, so we think some effect to our loading volume may be inevitable.
Q.1 As for this 2nd Half, results for Containership Business are estimated at minus 15. 7 billion yen and from Bulk Shipping Business at minus 2.3 billion yen, would you please tell us breakdown for 3rd Quarter and 4th Quarter?
A.1 For Containership Business, 3rd Quarter forecast is minus 10.0 billion yen, and 4th Quarter minus 6.0 billion yen. For Bulk Shipping Business, 3rd Quarter is minus 5.2 billion yen, and 4th Quarter plus 3.2 billion yen.
Q.2 What is the background of deficit increase from minus 0.7 billion yen in 2nd Quarter to minus 5.2 billion yen in 3rd Quarter? Considering recovery after the earthquake in car carrier and dry bulk markets, I think it would be slightly better.
A.2 As you can see from details of Non-operating Income/Loss and Extraordinary Income/Loss at lower right in Slide A-3 Estimate for Yearly FY2011, 2.5 billion yen appraisal gain resulted from variation of exchange rate of overseas subsidiaries' debt in 1st half but 5.0 billion yen appraisal LOSS resulted from same reason in 2nd half. This results from fluctuating exchange rates that bring appraisal gain or loss in our consolidated overseas subsidiaries' foreign currency debt for themselves, for example debt in Japanese yen.
In 1st half there was 2.5 billion yen appraisal gain realized from our Offshore Support Vessel Business's debt in Norwegian Krone because of the Krone being strong in 1st half.
In contrast there was total of 5.0 billion yen appraisal loss resulting from total Bulk Shipping businesses.
This is one of the main factors that caused the Bulk Shipping Business to fluctuate from 2nd Quarter to 3rd/4th Quarter.
Q.3 How much is Extraordinary Income/Loss for the entire financial year?
How much will income improve by cancellation, etc.?
How much do you count on earnings recovery/cost decrease in your target 5.0 billion yen + alpha this time which you mentioned previously?
A.3 With regard to Extraordinary Income including disposal of assets, we sold one older LNG vessel and 2 bulk ships in 1st half.
In addition we had 7.0 billion yen income due to share exchange by consolidated subsidiary with listed shares in Australia.
We sold some investment securities and as a result our extraordinary income in 1st half totaled nearly 10.0 billion yen.
In 2nd half about 3.0 billion yen is counted as extraordinary income due to sale of VLCC, AFRA-max tankers, Cape-size bulkers and Panamax bulkers.
We would like to sell some stock but we are currently in "wait and see" mode because of stock market declines at present.
Extraordinary loss in 1st half totaled 19.3 billion yen with main reasons being 16.6 billion yen impairment loss on revaluation of investment securities as of end September.
Another factor is cancellation of shipbuilding contracts.
In 2nd half we do not foresee large amount of extraordinary loss at this stage but included 0.5 billion yen.
For earnings recovery/cost decrease we reported at time of announcing 1st Quarter results the figure of 5.0 billion yen plus alpha in 2nd half of this year. At this time we are anticipating more then 10.0 billion yen in our estimate for 2nd half.
Q.4 How much can you roughly count on as target next year for cost decrease?
A.4 Regarding cost decrease, as I said before we should achieve over 10.0 billion yen additionally in this 2nd Half, so our annual target is in excess of about 20.0 billion yen this year.
We realize cost-cutting has to be done every year and we will continue further next year.
Q.5 With regard to investment planning, original idea was continuing annual investment cash flow of 80.0-90.0 billion yen for these two years. How much can you revise your original plan downward?
A.5 I understand the question is if we can shrink investment cash flow since investment plan was already decided in the past. My reply is that in order to shrink the plan further we have no choice other than to cancel, etc.
Basically we are freezing any new investment planning at this moment.
Therefore, our present investment plan is the same as we already announced before.
As we cancelled 3 small dry bulk ships this time, our figure was revised down slightly, but there is little revision as a whole.
Q.6 Considering economic stagnation in Europe and North America, slowdown of Chinese crude steel production and fuel oil price hike in addition to those factors, macro economic environment is very severe. If this situation continues, what will happen to your overall industry? What is your management thinking under such circumstances?
A.6 In case of a severe macro economic environment like the current economic stagnation in Europe and North America and the Chinese economy entered into correction phase, the first thing that comes to my mind is industry reorganization and that is likely to happen in general terms.
On the other hand, let me explain the management policy of Kawasaki Kisen Kaisha. I think one of the foundations of our management is comparatively stable profit in Bulk Shipping business which is showing a profit of 20.0 - 30.0 billion yen from medium and longer term contracts, etc.
Considering business structure of Containership business, I think volatility in Containership business is unavoidable to some extent. If Containership market declines, whether we can manage deficit of Containership operations from profit of Bulk Shipping business, and how we should change our Containership business to do so, I view as a very key point.
We are thinking of various options at the present time, one idea being rationalization, including shifting some work from Japan to overseas, as we have many business locations all over the world, especially being considered if current strong yen continues further. We are concentrating on how we can best cope with current challenges during the next few years, after which we will proceed to the next step. We are hopeful fuel oil price will decline from its current high level in case of severe economic environment and that the strong Japanese yen at nearly 75yen per US Dollar will not last long.