【Product Logistics segment】
Q.1. Regarding the fourth-quarter forecast, in the Product Logistics segment, you expect a loss from businesses other than Containerships, mostly due to losses in Car Carrier Business. This appears to be a conservative forecast. Please explain the background.
A.1. There are seasonal factors affecting cargo movements in the fourth quarter. Typically, cargo movements decline in December and January, which is the Christmas and year-end season. The impact of the decline shifts to the fourth quarter. Thus, we have revised downward somewhat our fourth-quarter forecast for cargo movements. There are also higher costs related to the use of regulation-compliant fuel oil. In regard to the switchover from high-sulfur fuel oil to low-sulfur regulation-compliant fuel oil, we had planned to use the high-sulfur fuel oil until the very end of the year and then immediately switch to regulation-compliant fuel oil. After fixing the vessel allocation schedule, however, we began using the regulation-compliant fuel oil about two weeks prior to the original plan. Using the more expensive fuel oil ahead of schedule caused fuel costs to be temporarily higher than expected. The forecast takes into consideration these two factors.
Q.2. Regarding the higher-than-expected fuel costs, please confirm that the impact will be realized in the fourth quarter instead of the third quarter due to voyage completion-basis accounting.
A.2. Your understanding is correct.
【IMO’s SOx regulations】
Q.1. Regarding the current status of the switchover to fuel oil compliant with IMO’s SOx regulations, the price of regulation-compliant fuel oil surged temporarily between the start of January and the middle of the month. How do you plan to transfer the price rise to costs? It would appear that ONE uses its OBS (ONE BUNKER SURCHARGE) to transfer the cost increase to customers. Is it possible, however, to transfer temporary surges in fuel costs using OBS? Or is the surcharge system designed so that prices are determined when fuel is actually procured to ensure that sudden increases in spot prices for regulation-compliant fuel oil do not have a large impact on your company?
A.1 “K” LINE has been very thorough in its procurement policy by securing enough regulation-compliant fuel oil to cover operational needs through the end of March. The price increase therefore did not have any effect on securing the fuel oil we need. Further, there are several different systems used to determine the fuel price. There are market prices, and then there is, for example, the MGO (marine gas oil) minus alpha system, which uses an index price and subtracts a certain amount to determine the price. We have agreements with customers based on the BAF (bunker surcharge) to ensure that we can transfer fuel cost increases to customers even in conditions like the recent surge in regulation-compliant fuel oil prices. Based on the contracts we have, there is somewhat of a time lag in recovering costs, as some costs are recovered during the January to March quarter and other costs are recovered in the next quarter. But overall the systems ensure that we can transfer the cost increases to customers.
ONE uses similar systems. ONE collaborates closely with suppliers on regulation-compliant fuel oil procurement and continually confirms beforehand that there is sufficient supply, including at bunkering ports. ONE also uses various systems to determine price. There are cases where the prices are determined in advance, and cases where prices are set based on a price difference with MGO. As with “K” LINE, ONE experiences a time lag in recovering costs, but overall ONE uses OBS to ensure that the prices it charges reflect actual fuel costs.
【Others】
Q.1. Regarding the impact of the new coronavirus, you mentioned the possibility of weaker cargo movements in Containership Business. Currently, do you forecast any impact on cargo movements in other business areas, such as the Dry Bulk segment or Car Carrier Business?
A.1. At the current time, we have not seen any specific indicators clearly pointing to the new coronavirus weighing on the market conditions. However, considering that economic activity in some areas has actually stopped, we must assume, especially for the Dry Bulk segment, worse-than-expected market conditions or a somewhat prolonged market slump.
On the other hand, for vessels docked in China, workers who took leave for the Chinese New Year cannot return. In this sense as well, some factors could emerge that reflect economic standstill.
Our forecast for Car Carrier Business is as follows: Wuhan City, where the coronavirus outbreak occurred, is a major automobile production hub in China. Japanese automakers have already suspended production at plants in the city. It’s possible, therefore, that eventually this production slowdown has an impact on cargo movements as China domestic car sales decline, car exports from China decline, and lower economic activity impacts car imports to China. Of “K” LINE’s overall Car Carrier Business, China business represents a very small portion, so there would be virtually little impact on our Car Carrier Business.
