Containership Business
Q1. The load factor in the 3Q for the Asia-North America trades is at a very low rate of 81% that hasn’t been seen in recent years. Was it because of market factors, or were there any special factors like a failure in winning competition due to your cargo collection methods or pricing? Please let me know the main cause.
A1. The demand was relatively weak and the short-term market fell for the outbound Asia-North America trades in the 3Q. There was even a situation where the freight rate dropped so that profit did not cover the cost for returning empty containers, depending on the cargo. For such cargo, we took the policy of not following the market and purposely not loading them, which led to such a result. The current situation is, the load factor of our company has returned back to more than 95%, along with recovery in the short-term freight rate market since January 1, in addition to a last minute surge in demand prior to the Chinese New Year for the Asia-North America trades. The load factor in the 4Q will depend on demand after entering the Chinese New Year in February, but we expect it to recover to more than 81% at least.
Q2. Please let me know the general picture of supply adjustment after the Chinese New Year. What is the state of preparation for supply adjustment based on cargo movements?
A2. As usual, the CKYHE Alliance and other groups won’t have as much cargo especially during the first week after the Chinese New Year, and reduced services of a considerable degree are planned. However, the situation is expected to recover gradually from the second week onward.
Q3. Please let me know the freight rates you estimate for the 4Q.
A3. Using an index, when the 1Q of fiscal 2008 is set at 100, the result of Asia-North America trades is expected to be almost the same as the result of 87 in the 3Q. Meanwhile, for Asia-Europe trades, we expect an improvement by several points compared to the result of 43 in the 3Q. Currently, freight rates for Asia-North America trades have improved more than our estimate by several points, and we anticipate that a certain level of rate increase will be achieved before the Chinese New Year since a rate increase is planned for the following week. On the contrary, current freight rates in Asia-Europe trades are failing to reach our estimate by several points, and companies have decided to postpone the rate increase planned for the next week to mid-February or later. From these factors, our view on freight rates is that the Asia-North America trades will be nearly the same as our estimate and the Asia-Europe trades may be slightly lower than our estimate.
Q4. Please tell me the trend of demand after the Chinese New Year.
A4. It is difficult to say anything definitive at the moment, but while the current situation in the Asia-North America trades is relatively favorable, including cargo volume, the Asia-Europe trades seem lacking in dynamism for the pre-Chinese New Year demand compared to that in a normal year. The first week after the Chinese New Year usually is a period where cargo volume drops by half, and the key points would be how well each shipping group makes supply-demand adjustments and how fast cargo movement recovers after the first week.
Q5. Please tell me the anticipated impact of the Panama Canal Expansion rumored to be completed in April on the container shipping business industry.
A5. The Expansion was originally planned to be completed in April, but now seems to have been slightly delayed. Once it is completed, vessels that couldn’t pass through the Panama Canal and had to use the Suez Canal will gain the option to transit the Panama Canal. However, we do not believe it will result in any drastic shift in the ratio of unloading on the West Coast versus the East Coast for Asia-North America trades for some time at least. It is true that the volume of cargo unloaded on the East Coast has increased compared to that of 2 years ago, but our current view is that the volume will probably not increase very much for some time to come considering the cargo handling capability of relevant port facilities.
Q6. I heard a shipping company established a system to accept large 18,000TEU ships at Long Beach on the West Coast of North America. Isn’t there a necessity to consider the risk of oversupply due to promoting introduction of larger vessels in the future, similar to the Asia-Europe trades?
A6. Since several years ago 13,000-14,000TEU type vessels have been calling at West Coast ports of North America, yet our observation is that they haven’t been utilized to their maximum potential. Establishment of infrastructure suitable for handling cargos on large vessels is not adequate, and as a result the vessels end up staying in such ports for an extended period of time. As duration of voyage for Asia-North America West Coast trades is relatively short, and large vessels staying in a port for a period longer than expected may cause port congestion; it is unlikely that large vessels produce a higher level of economy compared to medium-sized containerships like 8,000-10,000TEU types. We believe the possibility of 18,000TEU ships becoming the mainstream will be low for another several years, considering current status of ports in North America and characteristics of the trades.
Dry Bulk Business
Q1. Positive balance has been maintained for the last 36 years. Do you think you can achieve a positive balance for this term as well under this historically deteriorated market situation?
A1. Unfortunately, for Dry Bulk Business, a deficit is expected for this term after maintaining positive balance for 36 years. In addition to the significant reduction in demand for coal associated with the slowdown in Chinese economy, there was an increase in the supply arising from newly-built vessels entering services. Although there is a possibility of increased ship scrapping to counter the growing cost of investment into equipment compliant with environmental regulations, we believe it will still take a little longer for the market to recover.
Others
Q1. There was mention on the cost and such involved with structural reform. Please tell me the outline of structural reform for this term, or for the next term.
A1. We expect up to 2.0 to 3.0 billion yen for this term as the cost of structural reform, including reduction in the number of long-term charters for a total of 20 vessels for dry bulk carriers, as well as about 4.0 billion yen as improvement in the next term. Regarding depletion, we are planning to build a plan including the balance for the next term and to give considerations through counseling with our accountants once the market outlook becomes a little clearer.
Q2. Regarding prospects for the next term, there was an explanation stating “there are profit increasing factors even if the current market level lingers” during the announcement of 2Q financial statements in the previous conference. Is it practically possible to secure a positive balance by introducing large containerships and other means? If the market continues to deteriorate, is there any room for further rationalization, such as cutting back services for some trades?
A2. We believe improvement in performance in the next term by about 16.0 billion yen in total can assuredly be achieved, namely, about 10.0 billion yen for the Containership Business arising from completion of replacements with 5 newly-built 14,000TEU vessels and other factors; about 4.0 billion yen for Dry Bulk Business from structural reform; and about 2.0 billion yen for Car Carrier Business from progress in replacements with large 7500-vehicle pure car carriers (PCCs). On top of that, we should be able to cut the loss of about 10.0 billion yen from bunker swap settlement that occurred in this term. Adding the cumulative effects of our daily cost-saving activities, a little more than 30.0 billion yen is accounted as improvement in the balance. We believe it is possible to secure a positive balance even if the current situation continues.
