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Port Report: Japan's K-Line Books Loss On Charter Costs As It Seeks 2019 Restructuring

Port Report: Japan's K-Line Books Loss On Charter Costs As It Seeks 2019 Restructuring

Ocean shipping operator K-Line has  revealed massive business restructuring costs of hundreds of millions of dollars as it expects increased losses after its revitalization plan appears to have failed.

Tokyo stock exchange-listed K-Line, which is part of the Japanese shipping alliance known as Ocean Network Express and operates globally as part of THE Alliance with Hapag-Lloyd, announced Japanese Yen (JPY) 65 billion ($585.5 million) of business restructuring costs and has forecast losses of 21 billion Yen ($188.8 million) for the 2018 financial year.

The forecast is much worse than its previously forecast loss of 5 billion Yen ($45.0 million).

Restructuring the business

The shipping conglomerate is coy as to where it will incur charges but it appears to relate to high costs for chartering ships from third party providers in both the company's container and dry bulk segments. Firstly, the company recorded "as a rationally estimable amount" provision for losses of JPY15 billion (US$135 million) related to container ship chartering. Secondly, the company has announced that it will cancel chartering contracts of some "uneconomical" box ships and some small- and medium-sized dry bulk ships. Costs of charter cancellation are estimated at JPY50 billion ($449.6 million). According to the company, approximately 25 "fleets" are to be canceled.

K-Line hopes that slashing its fleet in this way will save about JPY10 billion ($89.9 million) in the 2019 financial year, a further JPY10 billion in the 2020 financial year, JPY8 billion ($72 million), in the 2021 financial year and JPY7 billion in the 2022 financial year.

The company appears to have announced further restructuring to claw back some of that JPY50 billion restructuring cost, although there are no real details or timeline. It is to undertake a "review of business portfolio" involving its joint domestic port transport business, the sale of real estate and the sale of "strategic holding shares."

Together these measures will raise JPY21 billion ($188.9 million). A further JPY15 billion will be raised by "disposal of other assets" although what these are is not disclosed. Thereafter, the company appears to hope savings from disposal of "uneconomical fleets" will start having an effect.

K-Line management hopes to improve the profitability of the business by focusing on four main areas. Firstly, it hopes to expand its stable income business fleets in the capesize dry bulk market – which may be problematic as the capesize freight rates have fallen off a cliff – and optimization of vessels in the smaller size sectors.

Its car carrier network will be rationalized for profitability management by services and freight restoration. Energy transport will be reorganized according to a risk-return evaluation. And, finally, as seems to be the current trend, K-Line will reform and expand the group's global network around its logistics arm, which will be the "core entity." The company says detailed plans will be announced during the coming 2019 fiscal year.

Forecast losses

It appears that K-Line is bleeding cash due to ongoing volatility and a general downward trend in freight rates.

The Shanghai Containerized Freight Index, a measure of freight rates across major container ship trade lanes, has been especially volatile over the last few years. The North Asia-East Coast rates peaked at just over 5,000 in or about March 2015 and slumped to a low of 1,500 in or about February 2016. And the freight rates on that route have been in a wide variety of other highs and lows throughout the last 10 years.

And the less said about the Baltic dry bulk index, the better. It hit about 4,300 in late 2009 and, over the following 10-year period, it never hit those highs again. By late 2018 it was hovering at about the 630 mark, a percentage fall of about 85 percent over a 10-year period. In financial terms, the Baltic capesize index was showing freight rates of about US$82,000 a day in late 2009; by late February 2019, it is closer to US$6,350 a day. That's a drop of nearly 93 percent in dollars per day.

This volatility in freight rates and collapse in prices goes a long way to explain K-Lines' woes.

In 2008 it was generating JPY 1.24 trillion ($12.2 billion at 2008 exchange rates) of revenues and JPY32.4 billion ($318.5 million) in profit. But business didn't go so well in the following years with K-Line's revenues, operating income, and therefore profit, fluctuating. The company generated big revenues in 2015 and 2016, with big losses too. In 2017 it made a tiny profit on huge revenues. In the same year, it announced a three-year turn-around plan but, as the recent announcement shows, it does not seem to have worked.

As of December 31, 2018, K-Line's fleet was comprised of 226 dry bulkers with a total weight-carrying capacity of 28.8 million metric tons. The company operates 90 car carriers with a deadweight of 1.47 million metric tone and 64 boxships of 4.94 million metric tone. K-Line also operated a number of other vessels, giving it a total fleet size as at the end of December 2018 of 536 ships with a total deadweight of 45.4 million metric tons.

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Posted-In: Freight Freightwaves Japan LogisticsNews Global Markets General


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