MOL Halloween Shocker As Revenues Slump

Mitsui OSK Lines (MOL) recorded a major drop in revenues in the first half of its financial year as container earnings fell off a cliff and the U.S.-China trade war took its toll.

However, the Japanese shipping conglomerate (JPX: 9104), one of the world's largest ship operators with a fleet of about 842 vessels, managed to limit damage to operating profits and also recorded substantial net income gains.

Financial Highlights

Reporting today, October 31, MOL revealed a 45.5% plunge in revenues for the first half of its current financial year. Operating profits fell by 2.7% on the prior corresponding period but net income jumped by 19.9%.

Japan's financial year runs from April 1 to March 31, meaning Japan's second quarter in its financial year corresponds to the third quarter in the calendar year.

In the six months from April 1 to September 30, MOL earned 574.3 billion Japanese yen. That's a little over $5.31 billion when converted using rates on the last day of September. It is also a fall of 45.5% year-on-year. Operating profit for the first half of the financial year fell by 2.7% when compared to the prior corresponding period to stand 12 billion yen ($111.00 million).

Net losses jumped from 5.7 billion yen in the first half of Japan's 2018 financial year to 25.6 billion yen in this financial year. That's an increase of 19.9 billion yen ($184.07 million).

Container Ships

MOL's box-ship first half revenues fell off a cliff. They decreased year-on-year by 32.7% to 114.2 billion yen ($1.05 billion). Meanwhile, ordinary profits rose, the company said, 15.6% year-on-year, having swung from a loss of 10.0 billion yen ($92.5 million) to a profit of 5.6 billion yen ($51.80 million).

Commenting on the results, MOL, which is one of the owners of the ONE shipping line, said that liftings by ONE increased on all routes owing to "stabilized services". Freight rates increased, except on the mainline Asia-Europe route. Improvements to profit were realized owing to cost reductions and the optimization of both the cargo portfolio and products.

Demand for container carriage fell on the Transpacific and Asia-Europe routes owing to the U.S.-China trade war.

Looking forward, MOL said that ONE is revising its short-term freight rate assumptions "in light of concern over [the] global economic slowdown".

Product Transport: Cars, Boxes, Ferries, Roll-on and Roll-off Ships

In this catch-all category, MOL reported 242.1 billion yen ($2.24 billion) of revenues, which represents a whopping 41.4% year-on-year fall but, curiously, a 15.3% increase in ordinary profit to 6.7 billion yen ($61.97 million).

MOL commented on the car carrying market. It said that the positive effects from an "absence of quarantine issues" that impacted some routes, along with a downsized fleet, was "offset by a decrease in trade for China from Europe and North America". Trade volumes to China fell owing to the Washington-Beijing trade dispute and "tighter" emission standards in China.

MOL carried just under 1.99 million vehicles in the first half of its 2019 financial year, just over one million in its first quarter and just under one million in its second quarter.

Meanwhile, ferries and coastal RoRo were generally firm owing to trucking workforce issues such as driver shortages, an aging workforce and "workstyle reform".

Overall, this segment's performance was fundamentally driven by the container ship sub-segment (see above).

Segment by Segment: Dry Bulk (Not Steaming Coal)

MOL's dry bulk business earned 136.7 billion yen ($1.26 billion) in the first half of its financial year, a fall of 5.8% year-on-year and an ordinary profit of 5.2 billion yen ($48.10 million), a fall of 3.4%.

The group highlighted a slump in the Capesize spot market owing to incidents such as the Brazilian dam collapse (which led to a shortfall in demand for the carriage of iron ore) but that the Capesize market has been firm since July. The group added that the market for smaller vessels was also firm but exposure has been "scaled down significantly". 

Other factors firming up rates included a decrease in ship supply owing to vessels being dry-docked for scrubber installation and an increase in demand for the carriage of grain out of South America. Bulkers renewed on long-term contracts benefited from having locked in rates during a "skyrocketing market" and so profits were stable "despite the decline in freight revenues".

Looking forward, MOL expects the dry bulker market to remain firm in the second half of its financial year owing to fewer vessels being available as segments of the world fleet continue to  enter into dry dock for sulfur-scrubber installation.

As of September 30 this year, MOL operated 287 dry bulk vessels with a total of 26.8 million deadweight tonnes. Deadweight refers to the cargo-carrying capacity of a ship in metric tonnes. One metric tonne is equivalent to 2,204.6 U.S. pounds. MOL operates 89 capesize ships, 29 panamax vessels, and 81 handysize to handymax ships, along with 88 other dry bulk carriers (short sea and wood chip carriers).

Energy Transport: Steaming Coal, LNG, Offshore, Tankers

This sector experienced an increase in results with a 3.7% rise in revenues to 139.2 billion yen ($1.29 billion) and a 3.6% rise in ordinary profits of 8.0 billion yen ($74 million).

Despite the violence directed against oil facilities and tankers earlier this year in the Middle East, MOL noted that, overall, the market was weak. This reflected a "seasonal decrease in oil demand at the beginning of spring and regular maintenance of refineries in the Far East". MOL added that charter rates for product tankers "struggled to rise" owing to the large number of newly built ships. MOL attributed its good results in this segment, despite market weakness, improvements in efficiency through pool operations, cost-cutting, long-term contracts and "steady implementation" of contract extensions.

The liquefied natural gas carrier division generated profits "mainly due to the completion of five newly built vessels," the group said. Also of note is that carriers of methanol (a light, colorless flammable liquid used as a solvent, a fuel, and as a precursor chemical) were said to show "steady, stable profits".

In the near future, MOL expects ton-mile demand to grow owing to procurement of fuel alternatives such as shale oil. The onset of winter in the northern hemisphere was also cited as a factor in driving demand. MOL added that it believes the impact of new vessel supply will be offset by vessel chartering concerns owing to US sanctions on Chinese companies.

As of September 30, MOL operated 179 tankers comprising 43 crude oil tankers, 19 product tankers, 1039 chemical tankers, and eight liquefied petroleum gas tankers. It also operated 48 steam-coal carriers with a total of 4.4 million deadweight tonnes. MOL also operated a combined fleet of 92 liquefied natural gas and ethane carriers.

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