K Line Sees Delay in Shipping Markets’ Recovery as Second Wave of COVID-19 Strikes Hard

Dry Bulk Business
In the Cape-size sector, market rates stayed at a high level at the beginning of the second quarter due to the recovery of movements of iron ore mainly from Brazil by the increase in demand for steel materials in China. In the middle of the second quarter and thereafter, market rates weakened after the supply-demand balance relaxed, following the gradual resolution of port congestion in China, which had been caused by the concentration of vessels. However, market rates picked up at the end of the quarter, staying robust overall.

In the medium and small vessel sector, although the shipments of grains from South America peaked out, the demand for shipments expanded due to the rapid increase in United States agricultural products purchased by China, and shipments of iron ore from India also increased more than usual, resulting in market rates staying robust. The vessel supply-demand balance did not recover, because new vessels were delivered one after another for all types of vessels, while the number of scrapped vessels did not increase as expected due to the decline in the operating rate of scrap yards due to the prolonged lockdown in India.

Under these circumstances, the Group strove to reduce operation costs and improve vessel operation efficiency, but remaining effect of weakened market rates in first quarter, the overall Dry Bulk Segment recorded a year-on-year decrease in revenue and a loss was recorded.

(ii) Energy Resource Transport Segment

Tanker and Thermal Coal Carrier Business
Concerning large crude oil tankers (VLCCs), LPG carriers, and thermal coal carriers, the business stayed firm for mid- and long-term charter contracts and contributed to secure stable profit.

LNG Carrier and Offshore Energy E&P Business
Concerning LNG carriers, and drillship and FPSO (Floating Production, Storage and Offloading system), the business stayed firm for mid- and long-term charter contracts and contributed to secure stable profit.
Concerning the offshore support vessel business, market rates declined due to the impact of oil price decline.

As a result, the overall Energy Resource Transport Segment recorded a year-on-year decline both in revenue and profit.

(iii) Product Logistics Segment

Car Carrier Business
Demand for ocean transportation declined steeply because of sluggish global sales and the production shutdown of factories in various countries due to the spread of COVID-19. Although the Group carried out to reduce costs by vessel operation stoppage, temporary trade service revision, and fleet restructure by sale or redelivery, the car carrier business recorded a year-on-year decrease in revenue and a loss was recorded.

Logistics Business
In the domestic logistics sector, cargo volume declined due to the spread of COVID-19.
In the international logistics sector, while air and ocean cargo transportation were affected significantly by a decline in cargo movements, cargo movements related to buyers’ consolidations mainly targeting e-commerce business operators as major customers stayed robust as in the first quarter. As a result, the overall logistics business recorded a year-on-year increase in revenue, but a profit was narrowed.

Short Sea and Coastal Business
In the short sea business, although the transportation volume of biomass fuel increased year-on-year due to the robust demand for environmentally responsive energy sources, the transportation volume decreased in steel materials, timber products and coal year-on-year basis due to the decline in cargo movement and the spread of COVID-19. In the coastal business, the transportation volume decreased year-on-year despite dealing with food and dairy products to make up for a decline in major cargo movements (e.g., paper and automobile) in the liner transportation. In the ferry business, the number of passengers and the transportation volume of passenger vehicles recorded steep a year- on-year decline because the movement of people was restricted following declarations of emergency due to the spread of COVID-19. In the tramp service, the business of vessels carrying limestone or coal stayed firm, but the transportation volume of limestone decreased year-on-year due to the decline in steel demand. As a result, the short sea and coastal business overall recorded a year-on-year decline in revenue and a profit was narrowed due to a lower transportation volume.

Port Business
The domestic terminal service sector recorded a year-on-year decrease both in revenue and profit despite robust container shipments in trunk lines. The international terminal service sector recorded a year-on-year increase both in revenue and profit due to robust container shipments as large size containership operated by The Alliance called at the Group’s container terminal (managed by INTERNATIONAL TRANSPORTATION SERVICE, INC.) in North America.

Containership Business
As for the performance of OCEAN NETWORK EXPRESS PTE. LTD. (hereinafter referred to as “ONE”), the Company’s equity-method affiliate, global cargo movements declined due to the spread of COVID-19. However, profit increased year-on-year, as the company strove to improve profitability through such measures as flexibly reducing the number of voyages in accordance with demand, reducing operational costs through optimal vessel operation, and reorganizing the cargo portfolio.

As a result, the overall Product Logistics Segment recorded a year-on-year decline in revenue but a profit increased.

Due to significant business performance improvement of “ONE”, the background is that robust cargo movement in east-west traffic and overall market rate improvement, the Company recorded 23,554 million yen as Equity in earnings of subsidiaries and affiliates.

(iv) Other Segment

Other Segment includes but not limited to the Group’s ship management service, travel agency service, and real estate and administration service. The segment recorded a year-on-year decline both in revenue and profit.

(2) Qualitative Information on the Consolidated Financial Situation

Consolidated assets at the end of the consolidated 2nd Quarter of this fiscal year were ¥923.729 billion, an increase of ¥27.648 billion from the end of the previous fiscal year as a result of an increase in cash and deposits and other factors.
Consolidated liabilities increased by ¥20.909 billion to ¥716.756 billion as a result of an increase in short-term loans and other factors compared to the end of the previous fiscal year.
Consolidated net assets were ¥206.973 billion, an increase of ¥6.739 billion compared to the end of the previous fiscal year as a result of an increase in retained earnings and other factors.

(3) Qualitative Information on the Consolidated Prospects for FY2020

In the Dry Bulk Segment, although there are signs of recovery for the supply-demand environment for ocean transportation, mainly of raw materials, due to economic stimulus measures taken by various countries, there are also concerns over the second spread of COVID-19, mainly in Europe. Therefore, it will take some time to see a complete recovery of market rates. Under these circumstances, speculative investments in vessels are expected to be restrained and the pressure for vessel supply is expected to be kept low due to an increase in the scrapping of old and uneconomical ships related to the enforcement of environmental regulations. Therefore, market rates are expected to gradually recover, mainly for Cape-size vessels. The Group will continue to implement measures to improve profitability, such as increasing vessel operation efficiency and reducing costs as well as to strive to secure stable profit by expanding mid- and long-term contracts that take advantage of its strength in high quality transportation.

In the Energy Resource Transport Segment, the Group will strive to secure stable profit under mid- and long-term contracts with respect to large crude oil tankers (VLCC’s), LPG carriers, thermal coal carriers and LNG carriers. In the offshore support vessel business, the Group will continue efforts to improve profitability through several cost reductions. In the drillship business, there is a possibility of worsening business results due to anticipated market rates after on-going time charter party.

As for the Product Logistics Segment, demand for ocean transportation is expected to fall steeply in the car carrier business due to the spread of COVID-19. The Group will strive to further reduce costs by temporary trade service revision, fleet restructure by sale or redelivery. In the logistics business, transportation volume and work volume are expected to gradually recover from the impact of the spread of COVID-19, starting in the third quarter. The Group will continue to strive to reduce fixed costs and improve profitability by securing additional cargoes while closely watching cargo movements related to e-commerce business, which have been increasing due to the global change in lifestyle in this fiscal year. In the containership business, with the uncertain outlook for cargo movements in the third quarter and beyond due to the spread of COVID-19, ONE will continue to implement various measures to improve profitability, while closely watching market trends.

As explained above, regarding the Company’s full-year results ending 31 March, 2021, a harsh business environment is expected with the spread of COVID-19, and the business environment surrounding the Company is to be kept uncertain, placing the top priority on controlling the damage to the full-year results, the Group will steadily implement such measures as reducing operational costs through scaling-back of the fleet in accordance with the decline in cargo volume, rationalization of vessel allocation, suspension of vessel operation and mooring of vessels, securing sufficient liquidity on hand, and asset sales intended to support the capital base.

Our important task is to maximize returns to our shareholders while maintaining necessary internal reserves to fund our capital investment and strengthen our financial position for the sake of sustainable growth. The Company will make a concerted effort to further improve its financial results, but it is with sincere regret that the Company announces it has decided to pay no interim dividend. The year-end dividend policy remains yet to be determined. We will announce in due course, when we have judged that we can forecast dividend payments after comprehensively taking into consideration the forecasts of the full-year results and the Company’s financial conditions.

Full Report

Source: Kawasaki Kisen Kaisha, Ltd