MOL Forecasts Another Record Loss Making Year

In 2013 New Year Message Mitsui OSK Lines (MOL) President Koichi Muto forecasts another record loss making year in 2013 as poor dry bulk and tanker markets take their toll.

MOL President Muto’s 2013 New Year Message:

I would like to take this opportunity to wish all MOL Group members a Happy New Year.

2013 is the Year of the Snake in the Japanese zodiac. The snake is supposed to bring good economic fortune as a symbol of wealth and prosperity. Since I was born in the year of the snake, I hope to bring in some of this good fortune. This year, I aim to lead by example in laying solid foundations for the MOL Group’s prosperity.

Today, I have three themes to discuss. First, I will look at the challenging business environment facing MOL. Second, I will talk about the course MOL must take to overcome this crisis going forward. Finally, I will say a few words about continuing measures at MOL.

MOL’s Business Environment

As you are well aware, MOL currently faces an extremely difficult business environment. Following on from our biggest loss ever in the previous fiscal year, MOL is projecting yet another loss of the same magnitude for the current fiscal year. The marine transport industry has faced a challenging external environment mainly due to economic slowdowns in Europe, the U.S. and China, the yen’s appreciation, and high bunker fuel prices. This has certainly been a factor behind MOL’s losses. However, we must also take a hard look at reality and ask ourselves why MOL has fallen into this predicament.

The biggest reason is that MOL’s free tonnages, namely tonnages with no committed contracts, have been operating at a large loss as a result of an unprecedented decline in dry bulker and tanker freight rates. While dry bulkers’ deliveries in 2012 surpassed the record-high level of the previous year, the seaborne trade volume of resources and energy grew at a slower pace due to slowing Chinese economic growth. This has widened the supply-demand gap for vessels, causing freight rates to remain at historically low levels over an extended period. Consequently, MOL’s free tonnages, which had generated large earnings when freight rates were buoyant, recorded losses that have significantly eroded the stable earnings accumulated through steady sales efforts in the past. As a result, the company as a whole fell into the red.

Starting from around the second half of 2013, we are projecting firm seaborne trade volume centered on emerging countries, while the supply of new vessels is expected to decline. We believe that freight rates will start to recover in step with an improving supply-demand gap for vessels. However, Chinese shipyards and other players have significantly expanded their scale of operation in recent years. If they continue to build new vessels at a rapid pace going forward to keep running their business, this shipbuilding could weigh heavily on the recovery of freight rates. To ensure that we restore profitability based on a stressed scenario where the business environment remains extremely challenging in 2013, we must shift to a business structure that is not reliant on a recovery in freight rates.

Future Measures

How should we address this situation?

First, we must reduce the market exposure of free tonnages, which is the driving factor behind our losses. Generally speaking, market downturns are a time for procuring competitive free tonnages. However, to reduce the risk of a decline in earnings due to market swings at the present time, we must work to reduce our market exposure by winning as much cargo as possible, while gauging the right timing. To do this, we must properly grasp customer needs by keeping a watchful eye on the markets and rapidly identifying signs of change. I want all employees to help build stable earnings by leveraging their individual sales capabilities to the fullest extent, making use of MOL’s reputation for trustworthiness and technological capabilities. Furthermore, we must enhance MOL’s resilience to market fluctuations by reducing its exposure to the risk of changes in market conditions. To this end, we must do everything we can to reduce the number of free tonnages in cooperation with our business partners. Measures will include the scrapping, sale, and redelivery of vessels as well as delaying delivery of new vessels.

In addition, we must transform our existing approach to sales activities by embracing a new business model. MOL has already been implementing measures such as centralizing Head Quarter functions of the Liner Division in Hong Kong, and upgrading and expanding the Dry Bulker and Tanker business using Singapore as a hub. Looking ahead, it is imperative for us to rapidly promote customer-centric sales activities in overseas shipping centers. I want you to shape a new business model unique to MOL through creative innovation.

Furthermore, we must execute cost reductions on an entirely different level. Make an inventory of costs on all levels by looking at every action you take and asking yourself why you are taking that action, while also working to improve business processes. Until now, we have produced results on the cost cutting front to a certain extent through measures such as the extended use of slow steaming. However, in my view there is still significant scope to reduce costs further. I myself intend to make a conscious effort to reexamine various expenditures.

Ordinarily, 2013 would mark the start of a new three-year midterm management plan. Instead, we are going to formulate a one-year management plan for fiscal 2013 as a business execution plan that incorporates all of the concrete measures I have discussed so far. To ensure that we restore profitability, we will concentrate on executing these measures rapidly.

I am sure that many of you are honestly hoping for a recovery in market conditions, which have been lackluster for some time. However, please remember that we ourselves are responsible for shaping the market through the business decisions we make on a daily basis. In the containerships business, despite a tough environment, we managed to restore freight rates in the first half of the previous year through measures such as adjusting our fleet size through a realignment of alliances, reducing services and restraining ourselves from excessive pursuit of high space utilization. This example shows that we do not have to remain at the mercy of the business environment. Rather, I want you to face market conditions boldly with the spirit of proactively playing a leading role in shaping the markets.

Continuing Measures

Safe operation will always be the highest priority in any environment. Safe operation is also the starting point for earning the trust of customers and all other stakeholders and remaining their preferred shipping company. I want you to further promote efforts to make our safety processes more visible, while achieving the “4 zeroes” for preventing serious marine incidents, oil pollution, fatal accidents, and cargo damage by making improvements in both our hardware, such as vessels and equipment, and our intangible assets, such as seafarers’ skills, ship management and our safety culture. Please perform your daily duties with the aim of making the MOL Group the world leader in safe operations.

Furthermore, compliance is a social responsibility shared by all companies engaged in economic activity. In September 2012, the Japan Fair Trade Commission conducted an on-site inspection of MOL based on allegations in connection with car carriers. To date, MOL has fully cooperated with the authorities’ investigation and will continue to do so going forward. Although these are only allegations, we deeply regret that MOL should be the subject of this sort of investigation. We recently revised our Guidelines of Compliance with antimonopoly laws as part of our efforts to rigorously enforce compliance. Once again, I strongly urge every MOL Group employee worldwide to remain strongly aware of our obligations to legal compliance and corporate ethics as you perform your duties.

British author Samuel Smiles penned the famous phrase “Heaven helps those who help themselves,” in his book Self Help, which was a driving force behind the modernization of Japan in the late 19th century. I want you to consider these words deeply as you implement each of the measures I have discussed. In the process, I hope that you will pool your knowledge and treat this as a new stage without being tied to precedent. Right now, our house is on fire, so to speak. Please show your true abilities by unlocking your hidden strength in this crisis, with the determination to do all you can to help restore profitability. After ensuring our return to profitability, we will draw up a future management strategy with the aim of advancing to a new stage of growth. I, too, am strongly determined to make every effort.

In closing, I would like to pledge my commitment to safe operation across the entire MOL Group in 2013, as I wish the very best of health and happiness for all members of the MOL Group and your families. Happy New Year!

[mappress]

MOL, January 4, 2013