【K Line’s Own Businesses】
Q-1: Profit in the Car Carrier Business decreased slightly. Was the decline in first-quarter profit simply caused by a lag in passing BAF and bunker costs on to customers, with little impact on transport volume or demand?
During the quarter, we heard that Chinese exports increased, the spot market was relatively favorable, and Japanese automakers were rerouting shipments to the Middle East. Please provide more details on the background to these results.
A-1: In the first quarter, we believe a relatively significant factor was the loss of cargo movements to the Middle East as vessels were unable to enter the region. Some vessels were also held inside the Gulf, which reduced fleet turnover.
As you noted, global cargo movements themselves remained relatively firm in the first quarter. However, because fleet turnover had declined, there were occasions when we incurred additional operating costs and took measures to improve fleet turnover in order to accommodate cargo demand.
Elevated market charter hire rates also had an impact, and overall, the cost impact was seen first. We do not believe this was limited to the first quarter, and we continue to hold the same view for the time being as disruption in the Middle East persists.
Q-2: What is your outlook for Dry Bulk freight rates and cargo movements in the second half? Please discuss Capesize and Panamax and smaller sizes separately.
A-2: The Dry Bulk market remains strong. Capesize spot freight rates have recently risen to the high 30,000-dollar range, approaching 40,000 dollars.
Cargo movements also remain firm. Iron ore cargo movements and crude steel production are increasing, while minor bulk and grain cargo movements are also strong. Overall, we expect the market to remain firm in the second half.
Of course, there are seasonal factors and we expect a slight correction from January onward. Even so, at this point, we expect the market to remain relatively strong.
Q-3-1: In the Energy Resource Transport segment, how does market exposure lead to higher profit? I had understood from your previous comments that there was little spot business. Given that you have revised the market assumptions and first-quarter profit was strong, could you explain how market conditions are reflected in earnings?
A-3-1: Some LPG carrier contracts have charter hire rates linked to market conditions.
These contracts generally consist of a fixed component and a market-linked component, and the current results reflect the LPG carrier market remaining at a high level.
Q-3-2: How did you develop the LPG carrier market assumptions? Looking at the VLCC assumptions, it appears that you have assumed market conditions will normalize from the second quarter onward. Did you use a similar assumption for LPG carriers? Is it correct to understand that the market conditions have not weakened so far?
A-3-2: Yes. You can assume that we have made a similar assumption for LPG carriers. Also, your understanding regarding the latter point is correct.
【Containership Business】
Q-1: Please explain your view of the freight rate assumptions in ONE’s revised forecast and the current level of freight rates.
A-1: Short-term freight rates trended upward through the first half of July. They then began to decline slightly from mid-July, and we announced a General Rate Increase on August 1.
Freight rates have been moving back and forth and have recently entered a modest correction phase. However, we do not believe that freight rates will continue to fall rapidly.
Unlike short-term freight rates, long-term freight rates include bunker surcharges, which can absorb a certain portion of the rise in bunker prices. However, ONE expects demand to peak out and front-loaded demand to gradually subside in the second half, causing short-term freight rates to decline gradually.
Q-2: You cited higher bunker prices as a reason for lowering ONE’s second-half forecast. What bunker price assumptions did ONE use compared with the current market? Please also explain the upside if prices fall below the assumptions and the downside if they rise above them.
A-2: The forecast reflects our view that elevated bunker prices cannot be fully absorbed, resulting in weaker second-half earnings compared with the first half.
Q-3: Do you expect freight rates to return to the levels seen before the deterioration of the situation in the Middle East by the end of the fiscal year? If possible, could you indicate what level you are assuming.
A-3: We believe short-term freight rates may return to the levels seen before the deterioration of the situation in the Middle East. While we cannot say how quickly that may occur, that is our current expectation. Conditions vary by route, but we generally expect such a trend to emerge.
Q-4-1: Why did the Containership Business return to profit in the first quarter? What caused the substantial difference from your original assumptions? Please explain the factors behind strong transport volume and freight rates, how they rose, and whether these conditions are likely to continue.
A-4-1: I will answer from the perspective of our full-year view of containership freight rates. In the first half, we believe there were several factors at play, including the impact of transit through the Strait of Hormuz, front-loaded demand ahead of the July review of U.S. tariffs on North American routes, and demand brought forward in anticipation of higher bunker prices and other general cost increases. These factors drove a sharp rise in short-term freight rates through the end of July.
It is difficult to predict how long this situation will continue. The summer peak season would normally still lie ahead of us, but front-loaded demand may cause the market to subside without reaching a seasonal peak, while underlying demand may remain relatively stable.
In addition, when considering the second half, how bunker prices develop going forward will be important.
On the supply side, ONE’s assumption is that vessels will be unable to transit the Suez Canal throughout the fiscal year and the Strait of Hormuz through the end of September. In addition, port congestion has recently emerged as another factor constraining supply. In Southeast Asia in particular, operations have been affected by seasonal typhoons as well as constraints in cargo handling capacity for large vessels.
Europe faces labor shortages and seasonal factors. Operations tend to slow each summer because of vacations. Whether these supply-side issues ease or persist will also have a significant effect on freight rates.
As such, there are new factors that make it difficult to assess the outlook solely based on supply and demand. We are therefore closely watching how conditions settle in the second half.
Q-4-2: Based on the data, port congestion does not appear to have changed significantly. If there was a surge in shipments in July, I would have expected congestion to ease. Can you explain what is causing the port congestion and why it is continuing?
A-4-2: Higher cargo volumes are naturally one factor contributing to port congestion. In Asia, as I mentioned earlier, typhoons and other factors have caused non-operating days when cargo cannot be handled. Europe continues to face chronic labor shortages, and resolving them remains a challenge.
During the COVID-19 pandemic, U.S. ports were the most congested. The main cause of congestion at U.S. ports was not the ports themselves but inland connections, specifically truck driver shortages and the time required for rail connections.
By region, cargo handling currently operates most smoothly in the United States. If congestion arises in the United States for any reason, conditions could become even more unstable.
Q-5: ONE lowered its second-half outlook. Excluding bunker prices and analyzing demand from the perspective of the U.S. inventory cycle, can we really say that demand was front-loaded?
Please explain any analysis you have conducted on underlying demand together with the U.S. inventory cycle.
A-5: The relationship between U.S. inventories and supply and demand is very difficult to assess. However, there has been a trend in recent years for the summer peak season associated with year-end demand to become less pronounced.
We understand this reflects changes in the way general consumer goods are sold in the United States. Sales once centered on department stores and large supermarkets, but have gradually shifted toward e-commerce, with promotional sales being conducted throughout the year.
Even so, seasonal factors remain. From the perspective of a shipping company, we are not yet able to consistently monitor and fully reconcile inventory indicators and freight rate movements, but we understand that inventory levels have been running at approximately 1.3 months of demand.
We believe fluctuations of less than 1% around this level are actually quite significant.
Seasonal factors also differ across various commodities other than general consumer goods, such as peripheral materials for IT-related data centers. Containerships carry a very wide range of commodities, making it difficult to directly apply overall trends to the containership peak season.
However, we believe there was a tendency for shippers to load as much cargo as possible on North American routes in the first half. We therefore need to closely monitor how the effects of that front-loading may play out in the second half.
Q-6: With containership demand being front-loaded, how do you expect carriers to respond if demand slows in the second half? August is normally the peak season, so I would assume that carriers rarely reduce sailings or implement blank sailings at this time of year. What is the current view across the industry?
A-6: On the carrier side, deliveries of new vessels continue to steadily add capacity. At the same time, as I have explained, various supply constraints have left very few containerships idle. As a result, almost all containerships are currently in service.
This reflects both the current strong demand and the need to maintain services. If demand declines toward the second half, we believe carriers, including ONE, will consider various responses while balancing the need to maintain service quality and service levels.
However, there is still considerable uncertainty about when and how demand will change, given factors such as the impact of the Strait of Hormuz and future developments regarding the Suez Canal. As such, it is difficult for us to provide a specific outlook at this point.
Q-7: For ONE’s first-quarter results, I believe you previously provided freight rate indices for the North American and European routes. Could you provide the specific figures for this quarter?
A-7: Beginning this quarter, we have changed the way we present information on ONE. Previously, we provided various indicators, mainly for major routes such as North America and Europe. This quarter, our aim was to provide a more comprehensive view, which is why we adopted the current format.
As for future disclosures, we will take your comments and questions into account, provide feedback to ONE and continue to consider and discuss how the information should be disclosed going forward.
Q-8: You forecast that ONE’s second-quarter operating revenues will increase 27% year on year and that second-half operating revenues will also increase 13%. What volume and freight rate assumptions underlie these forecasts? Please provide specific figures.
A-8: We expect strong results in the second quarter. Although we have presented a full-year forecast, I think many of you are interested in whether there is really a difference between the first and second halves. At present, please understand that this difference between the first and second halves is based on ONE’s assumption that the current elevated bunker prices will persist.
【Capital Policy】
Q-1: Regarding the cash allocation resulting from higher profit and operating cash flow in the current fiscal year, will you allocate the additional cash to shareholder returns or growth investments? Will you decide how to allocate it during the current fiscal year, which is the final year of the current Medium-term Management Plan period, or could the decision be deferred to the next Medium-term Management Plan? Please explain the timeline for making this decision.
A-1: We have not yet clearly determined when we will decide how to allocate any upside in operating cash flow.
However, we have already begun considering the next Medium-term Management Plan. Depending on the size of the upside, we will decide how to use the funds in conjunction with the next Medium-term Management Plan. In any event, we believe we need to reach a decision during the current fiscal year.
Q-2: At the beginning of the fiscal year, you outlined three priority issues for the next Medium-term Management Plan. You said you would announce the plan during the current fiscal year. Do you have any sense of the timing of the announcement, whether it might come with the first-half results, after the business environment becomes clearer, or depending on the status of internal preparations?
A-2: We do not believe it is realistic to expect the business environment to become completely clear. The timing of the announcement will therefore depend on whether we can conduct sufficient internal deliberations.
Naturally, we intend to discuss the plan thoroughly at the Board of Directors and continue those discussions until we reach a final conclusion that we can all stand behind as a company. We have not yet set a specific timing, so we appreciate your understanding that we are unable to provide a clear announcement date at this time.
【Other】
Q-1: I believe the initial plan estimated a negative impact of slightly more than 4.0 billion yen from the situation in the Middle East. How has that figure changed in the revised plan?
A-1: At the beginning of the fiscal year, we explained that the situation in the Middle East would have an impact of approximately 4.0 billion yen, mainly on the Car Carrier Business. This impact has continued in the second quarter. In the current fiscal year, the decline in profits expanded because the recovery of BAF in the Car Carrier Business will be deferred to the next fiscal year.
Please understand that the amount of this downward revision has been added to the financial impact of the situation in the Middle East.
