Jul 24, 2014

MOL gearing toward return to profitability in containership biz

Toward early return to black in containership business

Mitsui OSK Lines (MOL) is promoting the enlargement of the ships in its fleet and the reinforcement of its stable profit segments such as the terminal and logistics divisions in a bid to return to profitability in the containership business as soon as possible. With regard to fleet consolidation, the company will arrange for five 14,000-TEU ships that it plans to deploy to charter contracts starting fiscal 2014, and start employing 10,000-TEU vessels in the latter half of the year. By deploying large-size ships and reviewing its trade route operation system, MOL projects approximately Y20 billion in savings in terms of annual costs. Toshiya Konishi, managing executive officer of MOL, pointed out that, "If the freight rate levels evolve within our projected range, then it is possible to return to the black within this fiscal year." As for the terminal business, the company aims to attract more services with the launch of automatic stevedoring at its own terminal in Los Angeles this year. Now with the logistics segment, Konishi claimed that, "We aim to boost profits through such means as M&A toward the attainment of our targeted ordinary profit of Y10 billion in fiscal 2019."

With regard to the policy of the containership division under MOL's new medium-term management plan STEER for 2020, Konishi explained that, "We envision the freight rates to head toward downward path as the supply of ships bottoms in the market increases. We will build a cost system that can still generate profits even with that assumption." The company is targeting the reinforcement of its cost competitiveness and profit-earning capacity through such means as enlarging its own fleet and expanding its terminal and logistics businesses.

Under its scheme to boost its fleet, MOL plans to realize Y30 billion in cost savings by enlarging its ships and through the effects of expanding its alliances. In April this year, all of the five 14,000-TEU ships chartered from APL were put into service, while four of the ten 10,000-TEU ships, which were chartered as newbuildings from last year until this year, are slated to be deployed in the second half of this year. Konishi claimed that, "The effects of ship enlargement will immediately be felt starting this fiscal year. It is possible that we will realize cost savings of about Y20 billion through fleet ship enlargement and the so-called cascade method. Majority of such savings will probably be reflected in our business results starting fiscal 2014." Further, MOL expects to post several billions in savings from rationalization by expanding its G6 Alliance partnerships to the North America West Coast and Atlantic routes. It will also push for cost reductions through such means as the reinforcement of its program to undertake fuel-saving operations. With regard to some ships that are in service, the company is carrying out modification works on them in order to transform them into vessels with bulbous bow shapes that are fit for low-speed navigation. It is also studying the conversion of more ships in the future.

MOL intends to pursue the merits of scale to some extent while beefing up its cost competitiveness through fleet consolidation. Explaining about the background of the company's policy, Konishi said that, "It's not just about our market share. We have businesses where profits can be bolstered by securing a certain scale, such as in the terminal business. We are targeting revenues and profits not just in the transport segment but in all divisions in the containership business through synergy." A typical example would be the expansion of its terminals and independent bases abroad. With overseas bases, the company is moving to switch to independently operated subsidiaries from the hitherto local agencies. By increasing the number of markup subsidiaries, MOL will not only be able to boost its consolidated revenues/profits, but also control the rise in costs corresponding to the increase in cargo volume. With this, it will create a structure in which the expansion in scale will lead to the generation of profits.

The same thing is true for the terminal segment. At the Tan Cang-Cai Mep International Terminal (TCIT), a terminal operator at Vietnam's Cai Mep port, the surplus structure has taken root by luring in a lot of services. Even the terminals in Japan are able to prop up the intra-Asia routes that are struggling owing to the plunging freight rates, thanks to the move of MOL to pursue efficiency while securing ample cargo volume. In the future, the TraPac Terminal in Los Angeles will attract the most attention. It is projected to enjoy a dramatic leap in cost competitiveness as it became the first operator to launch automatic stevedoring in the North America West Coast in fiscal 2014. The terminal was forced to limit its cargo handlings last fiscal year due to construction works. But in/after next year, when the works toward fully automated stevedoring are completed, MOL hopes to boost its throughput by attracting more services.

MOL will also push the reinforcement of its logistics business as a segment with stable profits, similar to the terminal business. While its sales currently stand at around Y100 billion, on par with those of second-tier terminal operators, its profit margins are nearly double the industry average. In this regard, Konishi said that, "We will pile up profits centering on the non-asset-type businesses. We will also consider M&A."

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