Japan’s ‘Big 3’ suffering from bulk downturn

Japan’s three major shipping conglomerates all racked up major losses in the financial quarter ending 30 September, but one analyst believes their strong market positions in dry bulk bode well in the medium and
long-term. The three giants were hit by the simultaneous downturn in container, tanker and bulker markets, allied to rising operating costs and the strong yen.
NYK posted a ¥12bn ($153.4m) loss in the six months ended September 30, compared to a profit of ¥44bn a year earlier. MOL, meanwhile, turned net income in the six-month period to September 30 2010 of ¥48bn into a loss of ¥16bn this year, while K Line’s loss in the period was ¥18.6bn, compared to a ¥26bn profit a year earlier.
Janet Lewis, regional head of industrial and shipping research in Asia at Macquarie Capital Securities, said the three shipping companies were at a crossroads given that the major markets they operate in — dry bulk, containerships and tankers — were all facing simultaneous and severe headwinds. The container markets, where the three carriers do not have sufficient market share, was the major medium-term area of weakness, said Lewis, and it was difficult to see how the carriers could achieve meaningful returns in their current structures.
However, the bulk markets could prove a sphere of strength in the medium-term once current over-capacity in the market is worked through and rates recover. “MOL and NYK vie with China COSCO for top position globally in dry bulk,” she said. “The difference is that MOL and NYK have long-term contracts that are likely to underpin sustained profitability even as the
market bottoms,” she said in a Macquarie Research ‘Japan Shipping’ report.
“We believe that the three Japanese shipping companies will emerge well positioned as we work through the excess tonnage in dry bulk through a combination of scrapping, order postponement/cancellation. They have escaped the substantial losses experience by the largest owner, China COSCO, because most of their Capesize vessels are on long-term contracts.
“As Capesize vessels have been hit hardest so far by the downturn in rates, companies with a high exposure to spot rates like China COSCO have been hit hardest. The use
of long-term contracts enables the Japanese operators to match their commitments in terms of the cost of owned and chartered vessels with expected revenue.”
She predicted Capesize freight rate volatility would continue as miners such as Vale boosted their presence in the market and emerged as among the biggest operators in the world. She also predicted weak freight markets would continue into 2012.
“We are especially concerned about the outlook for Panamax vessels, which have an order-book outstanding equal to 48.2% of the fleet, with half of it due to be delivered in 2012,” she forecast. “The best hope is that some of these orders are postponed or even better, permanently deleted. Fortunately scrapping is remaining at a high level, with 19.4m dwt scrapped through September in 2011. Nevertheless, the global fleet has still grown by a net 56.6mdwt from January through September.”