New Year's Greetings from President Kudo
January 4, 2011
A Happy New Year to you all! Allow me to say a few words in opening our business for the year 2011.
Brief Overview of the World Economic Situation
It has been two years since the worldwide recession triggered by the financial crises in autumn 2008. This resulted in container cargo movement from Asia to Europe/the U.S. drastically decreased by around 15% year-on-year in 2009, and last year, in 2010, the figures sharply bounced up by around 15% from the previous year, marking a far better recovery than expected. In the end, it has fortunately taken us only a year to resume cargo lifting at the same level as before the Lehman Brothers shock. It must be noted, however, that some influence of the subprime mortgage crisis had already been observed since the first half of 2008. Cargo traffic for North America decreased by 8% from 2007 and so did that for Europe by slightly less than 1%. Accordingly, total cargo movement from Asia to Europe/the U.S. has not recovered to the 2007 level. Furthermore, the rapid revival seen in 2010 started to slow down significantly again in the last autumn. We might see a favorable upturn for North American trade, as population growth is positive in the region, but in Europe, where the population has started to decline because of falling birthrates and aging populations just like Japan, we cannot expect a double-digit increase in cargo volume. Overall, the majority view is that the increase in cargo traffic for Europe/the U.S. will stay at around 5% per annum in the near future. Meanwhile, following strong growth up to 2008
and a slight decrease of just below 3% in 2009, container cargo movement in Asia attained double-digit growth in 2010 and has since been back on a strong growth track. Considering both the around 5% growth for the Western markets and the double-digit growth expected in Asia, the NYK Research Group forecasts 7-8% as the growth rate of world container cargo movement in 2011 and 2012, and roughly 10% as the annual growth in container capacity for the same two years as a result of the completion of numerous outstanding orders for new containerships. This leaves a widening gap between demand and supply, for which we have to be prepared for some years to come.
Iron ore for China, one of the main cargoes in the dry bulk segment, did not experience any impact from the Lehman Brothers shock in 2009, recording a significant increase from 430 1million tons in 2008 to 630 million tons in 2009. In 2010, imports had been estimated to reach around 700 million tons. Even in the developed countries, where the impact of the Lehman Brothers shock was severe, a recovery of about 100 million tons of import iron ore had been predicted. Thus, a total increase of about 200 million tons of iron ore cargo movement in the world was expected for 2010 at the beginning of the year. At the other end, the supply side, about 200 Capesize bulkers, having a total transport capacity of about 1 million tons of iron ore annually per vessel, were supposed to be completed in 2010. This would bring about an additional annual capacity of 200 million tons. Therefore, it was widely believed that the supply-demand gap would not widen significantly and that the market would remain stable. Nevertheless, hikes in import iron ore prices drove China to shift to domestic sources of iron ore, particularly from the middle of 2010, despite the insufficient quality. Thus, although Chinese crude steel production has grown as expected, the import of iron ore unexpectedly remained at the same level as the previous year. Fortunately, the demand in developed countries recovered as expected. Yet, as a whole, the supply demand gap had to grow, and the market has been softening, though not enough to undermine profitability. Furthermore, another set of Capesize bulkers, worth an annual capacity of 200 million tons in total, is planned to be delivered this year; this raises mounting concerns over further widening of the supply-demand gap. It is true that underestimation of the growth in demand for resources and energy in China and other emerging countries from 2003 to the fall of 2008 caused an extremely tight supply-demand situation and resulted in unthinkable surges in those markets. However, we must fully understand that supplies have been reinforced by economic rationality, and finally supply has caught up with demands and started exceeding.
AIso, the tanker market, sensitive to demands in not only emerging economies but also developed countries, particularly the U.S., has been stagnant since it once tightened between January and June last year, reflecting with uncertainties of developed countries.
Our Business Results and Forecasts
The above-described economic and business conditions are also obvious in our financial results: we posted a rapid recovery in the first half of fiscal 2010 with an ordinary profit of about 80 billion yen, yet the profit is predicted to drop to a half of this figure in the latter half. This is of course partly because of seasonality (slack season), but chiefly, the greatest factor is the loosening gap between supply and demand, as previously explained. We have to be ready to see this trend continue into fiscal 2011. If so, our profit for fiscal 2011 will very likely drop below that of fiscal 2010. This is something we definitely have to prevent. Needless to say, that is why we engaged ourselves in the emergency structural reform project Yosoro (Steady Ahead) for these two years.
First of all, in the liner trade business, the operators learned the lesson that the best solution to achieve stable profit is to remove excess capacity, i.e., to do what we are supposed to do. This learning has been efficacious not only to the Grand Alliance but also other companies, some of which have reduced their services for Europe. Thanks to such initiatives, the freight rate level has stayed within the expected range, which enables us to post stable profits in coming years. In the meantime, it should be noted that the tight supply-demand situation that we experienced in the first half of last year will not likely occur again for the foreseeable future because slow-steaming is already in place and there is growing supply pressure. We must be prepared to see future profit levels dip lower than those of the first half of last year.
However, this negative factor has to be compensated for, needless to say, by the logistics business. Owing to the Yosoro project carried out in the wake of the Lehman Brothers shock, we have made significant progress in reforming our logistics business in the developed countries, thereby improving our competitive edge by far. The business of Double Wing Express (DWE), non-vessel operating common carriers (NVOCCs), is on the rapid rise, which is expected to contribute greatly to our profits. Moreover, in the Asia region, the pillar of our profit of logistics business, we have managed to take advantage of the rapid growth in the automotive logistics business in a timely manner, thanks to anticipatory investment, as the segment is one of our strengths. Yusen Logistics Co.Ltd took off in October last year, after the merger in Japan, to serve as the driving force of our logistics business. Consecutively, the merger abroad is also developing faster than planned and will probably be 70% complete by April this year and l am sure that our logistics business will expand more rapidly than ever.
The dry bulk business has entered the time where we can demonstrate our business rnodel focused on long-term stable contracts rather than short-term gain, not only in Japan but in emerging markets, particularly in China and India, even during the period between 2003 and 2008 when the market was extremely tight. In addition, around the same time, we established NYK Bulkship (Atlantic) N.V. as a brave step forward into the Atlantic market and for acquiring more customers. The outcomes therefrom are also very promising.
The export of Japanese cars, which amounted to about 4.3 million last year, is still in a difficult situation because of yen appreciation. Yet, this year, an increase of some hundreds of thousands is expected, and in addition, exports from Thailand, which recorded about 900 thousand vehicles last year and has become one of the major automotive exporters, are expected to exceed 1 million units this year. Similarly, exports from Indonesia and India are on the rise. Furthermore, China developed into an about 18-million-car market last year, outnumbering the largest number of vehicles ever sold in the U.S. Although its exports will not likely grow due to strong domestic demand, the number of imported cars, particularly from Europe, is increasing at a fast rate. The steep increases in domestic shipping and the considerable rise of car imports driven by strong domestic car sales support growth of our RORO terminal operation in China, which becomes one of the pillars of profit. In addition, our Chinese domestic distribution business currently handles 1 million vehicles a year with a thousand trailers and continues to expand.
Our priority for tanker business, which involves VLCC, LNG, and product carrier, remains long-term stability. In the case of VLCC, for example, the 37 vessels in operation today consist of 30 operated under long-term contracts - 21 domestic and 9 overseas - and 7 in the spot market. While there is a strong view that Japanese domestic demand is gradually declining, we have striven to explore potential customers globally. We will keep the pace of this effort and will have to maintain the profit level as well. On the other hand, in the offshore business that is close to the upstream of the energy business, we took preemptive efforts by entering the drillship, the floating production, storage, and offloading (FPSO), and the shuttle tanker segments as part of the Yosoro project. Most notably, we acquired 50% ownership of Knutsen Offshore Tankers ASA, which ranks second in the shuttle tanker industry. That means, we have obtained a device to expand the Brazilian market.
Nippon Cargo Airlines Co.Ltd, meanwhile, has succeeded in substantially lowering the breakeven point by means of overall replacement of airplanes and painstaking cost reduction. The company is expected to report an ordinary profit of as much as 7.5 billion yen for the term ending March 2011, thanks to the recovery in cargo movement and freight costs. Although it is still striving to improve the financial balance, Japan's inbound and outbound markets are not showing any sign of dramatic growth. For further scaling up, it needs to expand its overseas business just like ocean transport and logistics business. Under the circumstances, we are currently making every effort to find partners in China, the U.S,, and Europe to expand the field of our business.
The Strategy for Further Growth
In summary, the past two years of Yosoro was the time to recognize the importance of emerging markets and reinforce the effort to establish a stronghold for business expansion.
Of course, in order to further expand our business globally, the support of the corporate section is indispensable. We need to speed up building such a structure. Global business?developments necessarily entail investment expansion and, in turn sustainment of a solid financial foundation. To strike a balance between these two factors, we will have to quickly set forth relevant criteria for the investment, which enables us to select and set priority among candidates.
One other important element needed for global business expansion is human resources. It is critical to secure and foster talented staff members on a global basis. Specifically, the global logistics business, which deals with consumer goods and components, requires personnel with a wide range of knowledge across ocean, land, and air cargo transport.
Additionally, what brought us to enter the offshore business was indeed our confidence in our abilities to operate and work safely. In order to expand our presence in this segment, it is a must to recruit and foster excellent seafarers.
In this way, we are trying to largely expand our businesses. In the meantime, the Group’s fuel costs amount to 200 billion yen per year even after our Group-wide fuel-saving initiative. If we can cut this back by, say, 10%, it will not only save a significant portion of costs but also reduce environmental load significantly. I am willing to ask the Technical Headquarters, our crew, and vessel operators for their further engagement in this effort.
Besides environmental issues, which are an essential CSR activity, very regrettably, one of the NYK Group companies encountered an issue related to antitrust laws in the past years. We have to make sure that the same problem does not reoccur. Thorough implementation of compliance with laws and such matters is the very basis of CSR.
The emergency structural reform project Yosoro started in January 2009, was completed at the end of last year. Through activities under the project, we succeeded in turning the substantial deficit in fiscal 2009 into a positive ordinary profit of about 120 billion yen this year. l would like to take this opportunity to express my sincere gratitude to you all for your contribution in the latter half of the project, we hammered out a new mid-term management plan that sets forth our growth strategies for the three years from fiscal 2011. The plan, partly cited above, is now under finalization and is scheduled to be released at the end of March.
In closing, I would like to extend my best wishes to you all and your families for a healthy and happy year.
The news on this website is as of the date announced and may change without notice.