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4. Business Performance

A look at the global economy during the first quarter of fiscal year (FY) 2009 (April 1 to June 30, 2009) reveals signs of a recovery in China as it implements economic stimulus measures and, on the other hand, economic hardships is continuing in developed countries and other regions. In the U.S., the recession pushed forth unabated against a backdrop of low consumer spending, decreasing capital investment, a lackluster housing market, deteriorating employment conditions and other factors. Europe's downward trend also proceeded as consumer spending worsened and exports declined, among others. In Japan, although there are signs of a halt in the economy's free fall, uncertainties abound as exports falter, capital investment decreases and consumer spending remains low.

In the area of ocean shipping, the dry bulker market showed signs of a strong recovery as momentum gained from the latter part of May on the heels of increased iron ore imports in China and daily hire rates for Cape-size bulkers temporarily exceeded US$100,000/day at the beginning of June. Contrastingly, in the tanker market, the fall in crude oil demands following the collapse of Lehman Brothers kept crude oil tankers at a lower-than-expected range, while the markets for LPG carriers and petrochemical product tankers (MR-type) also declined. In the container trade, the crisis plaguing the economy since last year led to stagnant cargo trade in the main East/West routes and other routes and a weak freight rate market. This resulted in the recording of large deficits by many containership operating companies, which are implementing fare revisions of freight rates for normalizing the business environment.

After their sharp decrease subsequent to the Lehman Shock, crude oil prices gradually inched back up from the first quarter to as high as US$73/barrel (WTI) at one time in the middle of June, however, they generally remained at a low level. The average bunker price during the first quarter also fell greatly from US$560/MT in the same period of the previous year down to US$313/MT, while the average exchange rate during the first quarter was ¥97.21/US$, signifying a weakened dollar compared to the same period of the previous year.

As a result of the above, business performance over the first quarter greatly deteriorated compared to the same period of the previous fiscal year resulting in a deficit. The chart below shows consolidated revenue, operating income/loss, and ordinary income/loss by segment for the first quarter of FY2009, along with comparisons to the same period of the previous year and a corresponding summary.
(A) Bulkships
<Dry Bulkers>
Although the dry bulker market began its decline in the autumn of last year, the Cape-size bulker market saw signs of a recovery as it gained momentum in the latter part of May on the heels of increased iron ore imports in China, at a level surpassing that of the previous fiscal year, and the Cape-size charter rate temporally exceeded US$100,000/day at the beginning of June. On the other hand, although the decline in general dry bulkers, from Panamax on down, bottomed out, the present economic doldrums continued to slacken cargo trade for general freight, leading to limited recovery to a modest level. Despite securing a certain amount of profit from fluctuating revenue due to the aforementioned economic environment as well as stable revenue from long-term contracts for iron ore, coal for power generation, wood chips, etc., the first quarter saw earnings fall significantly lower than the same period of the previous year.

<Tankers/LNG Carriers>
The tanker business was at a low level as limited demand for crude oil after the Lehman Shock kept the market for Japan-bound double-hull VLCC laden in the Persian Gulf at the low WS range of 20 to 60. Further, the LPG carrier and petrochemical product tanker (MR-type) markets also dipped. As a result, this segment posted a deficit during the first quarter.
Since the LNG carrier business was continuously supported by stable revenue from long-term contracts, there was a slight increase in profits compared to the same period of the previous year.

<Car Carriers>
Struck by a decline in demand for automobiles in North America and other regions, the continuation of reduced production policies on the part of automobile manufacturers to meet inventory adjustments significantly eroded automobile cargo trade compared with the same period of the previous year. This caused a deficit in this segment during the first quarter.

(B) Containerships
The economic crisis beginning last year led the cargo trade on the main East/West routes and other routes to stagnate and depressed the freight rate market. Despite efforts to improve circumstances through freight rate negotiations effected in April and May, pressure to lower rates due to a deteriorating supply-demand balance intensified leaving this segment in unfavorable conditions. On a brighter note, the fall in bunker prices was a factor in the improvement of income compared to the same period in the previous year. Other efforts were also made to improve income such as promoting lay-ups of surplus vessels, ship sales, chartered vessel cancellations and size reductions as well as cutting costs aggressively through fuel savings by slowing down ships and suspending unprofitable routes. Unfortunately, effects created by the above cost reductions and other activities to improve income were surpassed by negative effects such as deteriorating freight rates and decreasing loading volumes making a significant deficit in this segment.

(C) Ferry and Domestic Transport
In the ferry business, decreasing passenger and cargo volumes due to the recession, discounted highway toll fees, the outbreak of the H1N1 flu and other factors compressed income. Domestic transport fell resulting in a deficit as the deteriorating economy brought transportation to a standstill especially for steel materials. Results in this segment showed a deficit that exceeded that of the same period in the previous fiscal year.

(D) Associated Businesses
A firm performance overall was demonstrated in the real estate business, in which Daibiru Corporation, our subsidiary, is a central player. This is despite lower profits compared to the same period in the previous fiscal year due to factors such as an increase in depreciation expenses associated with the construction of new buildings. The travel agency business saw a downturn due to the diffusion of H1N1 and corporate travel expense restrictions. The cruise ship business also suffered from the unavoidable effects of H1N1. In the trading business, ship product and material sales stalled due to lackluster ocean shipping conditions. As a result, profits in the associated businesses segment during the first quarter of FY2009 fell short of the same period of the previous year.

(E) Others
Other businesses, which are mainly cost centers, include ship operations, ship management, ship chartering, financing and shipbuilding, among others. Profits for the first quarter of the year in this segment were lower than the same period of the previous year.
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