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For Japan’s Big Three ship owners — Mitsui OSK Lines, Nippon Yusen Kaisha (NYK Line), Kawasaki Kisen Kaisha (»K«Line) — dry bulk shipping is no longer a key driver of their businesses. The weak Baltic Dry Index (BDI) compels the trio to reduce spot exposure
At least, that is the case in the short term. With their bottom lines battered by the deteriorating dry bulk[ds_preview] freight market, the trio are drastically reorganising their dry bulk businesses, with substantial ramifications for their tonnage providers.

The BDI has been languishing at historic lows of over 300 points, as China’s demand for dry bulk commodities slows with its economy, while there are too many ships available. In 2015, 47.4 mill. dwt of bulkers were delivered, 3% more than in 2014. For 2016, 83.8 mill. dwt of bulkers is scheduled to be delivered, although a significant number of delays and cancellations are expected.

MOL, the world’s biggest ship owner, wants to reduce the number of Capesize bulkers that are exposed to the spot market, and withdraw from offering excess tonnage in the spot market for Panamaxes and other smaller bulkers. Instead, the company will focus on consecutive voyage charters and contracts of affreightment.

A Japanese shipping source told HANSA, »The tonnage providers built these ships on the back of long-term charters to blue-chip operators like MOL, NYK and »K« Line. If these charters are terminated prematurely, it would have implications on the financing arrangements, as the banks approved the loans on the basis of the long-term charters.« MOL, which has downgraded its forecast for its current financial year, which ends on 31 March 2016, from a 17 bn JPY (149.4 mill. $) profit to a 175 bn JPY loss, said that the dry bulk freight market condition had become worse than it earlier anticipated.

The company will also restructure its dry bulk divisions and establish the Dry Bulker Business Unit as it implements structural reforms to optimise the fleet portfolio and make more efficient use of management resources. MOL will also set up the Energy Transport Business Unit as an organisation that manages divisions by ship type in what the line says will allow it to better respond to diversified customer needs. This division will manage the tanker, LNG and offshore businesses. In explaining its need to reduce the number of bulkers trading on the spot market, MOL, led by Junichiro Ikeda, said, »In the dry bulker business, the market is deteriorating to a new record low due to the imbalance of fleet supply and demand, along with stagnant cargo trade resulting from the slowdown in China’s economy since last fall.«

Although the company expects the market to recover to some extent, in light of its uncertainties it decided to implement structural reforms in these businesses to address the abruptly changing business climate.

Mitsui OSK Lines’ decision to scale down its spot exposure to the dry bulk shipping market has caused concern among ship owners and operators, as nearly 100 bulkers could be redelivered prematurely to their owners. Ship databases show that MOL operates 143 bulkers, of which 57 are owned, while another 86 vessels are owned by mostly Japanese tonnage providers.

A spokesman for MOL told HANSA that the exact number of ships that would be redelivered has not been confirmed. »We have a plan to withdraw free vessels from spot market, which will mean a significant reduction, but we have not yet arrived at a specific number of vessels,« said the spokesman. When asked about the termination fees, the MOL spokesman said, »Nothing has been decided and details are still under study.«

The same databases show that NYK Line operates 167 bulkers, of which 141 are owned, while »K« Line operates 135 bulkers of which 75 are owned.

NYK Line told HANSA that it has been practising slow steaming and selling some of its bulkers, or terminating charters with high costs. NYK said, »Market conditions have been sluggish even though shipments of iron ore and grains were higher in 2015 than in 2014, while coal volumes declined. Although the scrapping of bulk carriers, particularly Capesize ships, has been underway, excess tonnage has not been cancelled out because of the ongoing production of new vessels.« NYK Line has downgraded its full-year profit forecasts from 47 bn JPY to 25 bn JPY.

»K« Line, which has reduced its full-year profit forecasts from 12 bn JPY to 5 bn JPY, said that a 30% year-on-year decline in coal shipments to China, affected the earnings of the company’s Supramax and Panamax bulkers. The oversupply of Capesize vessels was also too much for the amount of iron ore and coal shipped to China.

The company’s chairman, Jiro Asakura, is a dry bulk veteran, and is relying on his experience to guide »K« Line through the poor market. Company sources told HANSA that Asakura firmly believes that it is not appropriate to renegotiate charterhires. A spokesman for »K« Line said that the company has eschewed charter cancellations, opting not to renew such contracts upon expiry, in addition to scrapping and selling some owned vessels. He said, »With regards to the counter measures shipping companies could take in such adverse market condition, it really depends upon the situations and the circumstances. These include how long the weak dry bulk market is forecasted to continue low, the remaining period of the charter contracts, and the penalties for early termination of these contracts. For the bulkers which we judged inefficient in terms of profit generating, »K« Line has been deciding not renewing the charter contracts with the owners for expiring ones as above and also selling out of some owned ships to the marketplace including scrapping. We can’t provide further details, but the necessitated financial burden by doing so has been already counted in the updated profit amount forecast of this fiscal year announced as of end January 2016.«
Zeng Xiaolin