MOL faces a variety of risks in its worldwide operations. For the types of risks explained in the below chart, the respective division in charge takes steps to mitigate risks, including identifying risk amounts, reducing risk exposure with hedges, and transferring risk through insurance and other means, in accordance with defined rules and processes in each division. The situation of risk management in each division is periodically reported to the Executive Committee, where information is centrally managed and necessary decisions and responses are made.
For new investment decisions, the division responsible for assessment identifies risks and evaluates them as needed with the relevant division, and then the decision-making process starts. Depending on the importance of the project, the Investment and Finance Committee discusses the matter prior to deliberations by the Executive Committee to dive deeper into the risk and summarize key points of discussion. Matters of utmost importance are put on the agenda of the Board of Directors’ meeting after deliberate discussion by the Executive Committee. Risk management is emphasized in making decisions, such as making it a rule to discuss the matter based on a summary sheet of potential risks.
- Risks Associated with Operations of Vessels and Offshore Plants
(Maritime accidents, oil spills, piracy, etc.)
- Shipping Market Fluctuation Risks
- Exchange Rate Fluctuation Risks
- Interest Rate Fluctuation Risks
- Bunker Price Fluctuation Risks
- Climate Change Risks
- Cybersecurity Risks
- Natural Disaster and Epidemic Risks
- Group Governance Risks
- Risks Related to Supply Chains
- Risks Related to Human Rights
- Overview of Total Risk Control
Risks Associated with Operations of Vessels and Offshore Plants
(Maritime accidents, oil spills, piracy, etc.)
Centered on marine transport, MOL operates roughly 800 vessels of various types and offshore plants. As a company that provides social infrastructure, some of the most serious risks we face are damage to ships and cargo or injury to crew members caused by vessel collisions, ships running aground, fires and other accidents, as well as environmental pollution from leakage of cargo oil and bunker oil (oil spills). To prevent accidents from occurring, without regard to owned vessels or chartered vessels, MOL’s Safety Operations Headquarters, sales divisions, shipowners (for chartered vessels), and ship management companies work closely together on tangible and intangible aspects of safety, from training and supervising crew members to adoption of safety standard specifications which effectively maintain the safety of our vessels. We also make a variety of preparations to counter the dangers of piracy and terrorism by providing sufficient training, putting in place precise operational rules, providing support from Head Office, and installing necessary facilities. (→ Please click here to learn more about our safety initiatives.)
Even in the event of an accident that could not be avoided despite our best efforts, involving damage to MOL or related parties, the Company is prepared with insurance policies that have the necessary amount of coverage (general liability insurance, hull insurance, war-risk insurance, loss of earnings insurance) in order to secure adequate funds for any compensation and to avoid a major impact to profit.
To mitigate reputational risk, MOL implements emergency response training once a year for major maritime accidents, responding to the media and disclosing information about the accident. Media consultants are hired when necessary. (→Please read this press release for details on the tabletop drill held in 2021.)
Shipping Market Fluctuation Risks
Another fundamental risk on a par with accidents in the marine transport business is the risk of fluctuations in the shipping market. Maritime cargo movements are affected by political and economic trends in countries around the world as well as changes in industrial structures, and the vessel supply increases or decreases depending on the strategies of players in the industry. Both demand and supply for shipping is difficult for our company alone to control. To prevent excessive market risks, we manage risks by (1) limiting the total amount of risks, (2) dispersing risks, and (3) reducing the amount of risks during each fiscal year. Additionally, we manage our total amount of shipping market risks with a method we uniquely developed, called Total Risk Control to periodically measure and control risks so that it does not become excessive in comparison with shareholders’ equity.
Limiting the total amount of risks
To limit total risk exposure, we take steps to obtain medium- to long-term contracts with domestic and overseas customers that are highly creditworthy. In addition to narrowing down the portion of the fleet that is exposed to the market, we work to minimize risks by setting vessel charter periods from shipowners to coincide with periods of contracts with customers, thus neutralizing our exposure to market fluctuation.
Variation of Procurement and Contract terms
(as of March 2021)
■Owned or mid- and long-term chartered vessels with mid- and long-term contracts
■Owned or mid- and long-term chartered vessels with short-term contracts (market exposure)
■Short-term chartered vessels with short-term contracts
Market Exposure Ratio for Major Vessel Types (Consolidated, by no. of vessels)
(as of March 2021)
|Total number of Fleet||Market Exposure Ratio|
|Mid-and small-size bulkers||101||2%|
Vessels operating under contracts less than two years, which are owned or mid-and long-term chartered vessels.
(Includes vessels that combine multiple customers' cargoes.)
MOL Group operates various types of vessels, including dry bulkers, tankers, LNG carriers, car carriers to containerships, transporting a wide variety of raw materials and finished goods. In addition, we are expanding our business in the offshore business field, such as FPSOs (Floating Production, Storage and Offloading Systems) and FSRUs (Floating Storage and Regasification Unit). Different types of vessels, cargos and businesses have different freight and charter markets. While some are highly correlated with each other, others offset each other’s fluctuation depending on the economic environment. By operating multiple types of vessels and businesses with various correlations, we aim for a stable business management that is not dependent on particular segment’s market condition. MOL constructs an optimum business portfolio by considering how much market exposure the Company can tolerate for each type of vessel, which enables the Company to pursue higher profits while mitigating risks. (→Please click here to learn more about MOL Group’s businesses.)
Reducing the amount of risks for each fiscal year
We also reduce the amount of risks for each fiscal year by using freight forwarding agreements (FFAs) to hedge risk on vessel types such as Capesize bulkers and Very Large Crude Carriers (VLCCs). This way, we reduce market exposure for each fiscal year that is already in progress and stabilize our earnings.
Exchange Rate Fluctuation Risks
While Japanese international shipping company’s revenues are mostly in U.S. dollars, some costs and borrowings are on a Japanese yen basis, presenting an exchange rate risk. MOL strives to limit its exposure by dollarizing costs and borrowings. To reduce this risk further, we also flexibly employ foreign exchange hedging to limit profit sensitivity.
Interest Rate Fluctuation Risks
The MOL Group uses bank loans and corporate bonds for the working capital and other capital requirements, and the portion procured at variable interest rates is exposed to interest rate fluctuation risk. When securing long-term funding to build new ships or replace existing ones, in principle we hedge interest rate risk by using fixed-rate loans or interest rate swaps, etc.
Bunker Price Fluctuation Risks
Bunker costs represent a large portion of ship operating costs, and in the past, price fluctuations had a significant impact on the MOL Group’s profits. However, currently, most medium- to long-term contracts with customers contain bunker adjustment factor or bunker price surcharge clauses that have the customer shoulder the risk of bunker price fluctuations. For short-term contracts, we work out freight rates reflecting bunker prices at the time, or employ a formula to adjust freight rates that take into account changes in bunker prices. For the remaining exposure, we work to reduce the risk amount by using bunker forward trading. With these countermeasures, the impact of bunker price fluctuations on profit and loss is now very limited.
Climate Change Risks
By causing more severe weather and sea events, climate change such as global warming can present a danger to safe ship operations. The movement toward decarbonization to combat climate change has the potential to drastically change the business environment for MOL, which requires large volumes of bunker oil and transports various kinds of fossil energy as a main cargo, in the context of higher costs to comply with public regulations and a structural reduction in transport demand.
Under MOL Group Environmental Vision 2.1, which is in tune with these trends, MOL aims to achieve net zero GHG emissions by 2050. The Company has formulated and disclosed a road map for achieving this goal, and is now in the process of introducing clean alternative fuels and energy-saving technologies while increasing the sophistication of efficient fleet operations. By developing and providing solutions for alternative fuel transportation and low-carbon or decarbonization technology, MOL views this change as a business opportunity as decarbonization stimulates new demand. The MOL Group uses the TCFD framework to visualize its climate change risks and formulate related policies.(→Please click here to see our disclosure based on TCFD recommendations.)
MOL implements preventative measures to counter cybersecurity risks that have increased in recent years. We are also prepared to take steps to minimize any adverse effects. (→Please click here to learn more about MOL Group’s cyber security.)
Natural Disaster and Epidemic Risks
An earthquake, other natural disaster or an outbreak of an infectious disease (hereinafter "disaster or similar event") could affect MOL-operated vessels, offices and facilities, as well as employees, hampering business operations.
MOL has formulated a business continuity plan for such an event to ensure the safety of its vessels and personnel as a top priority and continue providing its services to play a social role in supporting world’s supply chain or quickly restore its operations in the unlikely event that they are suspended. This business continuity plan clarifies responsible organizations and delegates authority for duties relating to maintaining the safe operation of vessels, execution of transportation contracts and charter agreements, financial preparation, securement of required personnel, and other matters.
In addition, we have established satellite offices and backup systems. We also distributed notebook PCs to all executives and employees and put remote working environments in place that use cloud-based tools. We regularly conduct drills at the head office and outside, and continue to improve the effectiveness of our responses by addressing the issues identified from these drills.
Group Governance Risks
The MOL Group consists of more than 450 companies around the world. To ensure operations are being properly executed at each company, Group companies submit required reports to MOL in a timely manner in accordance with Group Company Management Regulations. MOL adequately ascertains the financial conditions and business risks of these Group companies, and requires them to obtain permission prior to executing important management matters.
To ensure compliance at Group companies, we set rules for each Group company that are based on MOL’s rules, and the officers, employees, and temporary staff of Group companies can report to MOL’s Compliance Advisory Service Desks.
With regard to audits, each company has an appropriate internal audit structure, and Group companies in Japan and overseas are audited on a periodical and ad hoc basis by MOL’s Corporate Audit Division in accordance with the internal audit rules.
Risks Related to Supply Chains
MOL procures vessels from shipyards (owned vessels) as well as other shipowners (chartered vessels). Given that marine vessels are the lifeblood of our business, we apply the MOL Safety Standard Specifications to both owned and chartered vessels (with the exception of short-term charters) to make the equipment of all vessels under our control live up to certain standards and keep our Standard Specifications constantly updated to ensure their effectiveness. During the construction of our owned vessels, we send supervisors to the shipyard to keep a close on-site watch on building quality. These supervisors work with shipyard masters and safety management officers to check the situations of sites and identify risk factors for worker injuries and fire outbreaks, requesting improvements if necessary. In light of the accident off Mauritius in 2020, MOL is now working on reinforcing safety management for chartered vessels on all fronts, including deepening its involvement in the selection of crew members that shipowners assign to ships.
When we sell off our vessels, in cases when the buyer intends to dismantle the vessel, we bind them to use a demolition yard that has third-party certification (from ClassNK) stating that the yard meets all prescribed safety, environmental, and labor standards and complies with the Hong Kong International Convention for the Safe and Environmentally Sound Recycling of Ships*. We also keep track of the dismantling process by requiring detailed reports of the work.
As described above, by being actively involved in the process even before the delivery of a new vessel from a shipyard or a shipowner as well as in stages after the disposal of a vessel, we will continue to ensure safety, reduce environmental impact, and improve labor conditions of workers.
We also follow the MOL Group Basic Procurement Policy when purchasing any product or service, including vessels.
* The convention was adopted by the IMO in May 2009 to ensure the safe and environmentally sound recycling of ships. As of August 2021, the convention has not yet gone into effect as it is still in the process of being ratified by some countries. The convention requires vessels to prepare, record, and update inventory lists showing the quantity and location of hazardous materials within the ship’s structure and onboard supplies. It also establishes the conditions required of ship recycling facilities (demolition yards). Ahead of the convention’s enforcement, MOL has already adopted rules for demolition yard selection pursuant to the convention.
Risks Related to Human Rights
As a company with operations around the world, MOL respects the human rights of Group employees and all the people involved in the supply chain. It is essential that we ensure their safety and health, and create environments where diverse human resources can play an active role. MOL’s Rules of Conduct for executives and employees include sections about respecting human rights and prohibiting discrimination and harassment of any kind, and this has been promoted as a theme related to sustainability issues. In addition to satisfying international standards, such as the International Labour Organization (ILO) and Maritime Labour Convention (MLC 2006), MOL strives to maintain even higher levels of standards in this regard. (→Please click here to learn more about our initiatives on human rights.)
Overview of Total Risk Control
- Importance of Risk Exposure Management and Introduction of Total Risk Control
Not only can freight rates be extremely volatile, the availability of means such as leasing and chartering vessels allows shipping companies to expand their fleets relatively easily without necessarily being restricted by their balance sheets. This mix of extreme volatility and ease of leveraging means that this kind of business is one wrong step away from taking on too much risk. For the long-term stable operations of marine transport companies, it is of vital importance that a company identifies the total risk exposure it can take and understands the amount of risk it is actually taking, while having a framework for balancing these two factors.
At end of the marine transport boom in the 2000s, MOL failed to cut back on investments at the right timing, anticipating ship tonnage shortages to continue around the world. Having placed a large volume of orders for ships, MOL began to receive these ships, built at a high cost, while the market entered a long-term slump in the 2010s. This continued to weigh heavily on the Company’s profits until management decided to make drastic business structure reforms. Learning its lessons from this painful experience, MOL developed and introduced its own risk management framework, called Total Risk Control, in 2014 as a set of constitutional guardrails against excessive investment in the future.
- Approach to Total Risk Control
Total Risk Control is a marine transport industry adaptation of the risk management methods widely used by financial institutions. Considerable stressful scenarios (low freight rates, weak vessel sales & purchase market) are applied to the entire fleet at the same time and run for a certain length of time to calculate maximum potential losses. The risks are managed so that the total loss is not excessive compared with shareholders’ equity. Basically, this identifies the total exposure to risk taken based on the standard criteria that all debt can be repaid if all owned vessels were to be sold. Under this framework, for example, a Capesize bulker will be assessed as having low risk exposure if it has a long-term contract or a low book value (if owned) or charter rate (if chartered). Conversely, the same Capesize bulker will be assessed as having high risk exposure if it is subject to a short-term market or a high book value (if owned) or charter rate (if chartered). Additionally, we take into account the dispersion effect where the freight and charter market for each kind of ship fluctuate at different times. Companywide risk exposure is calculated once every six months, and the results are compared with shareholders’ equity, reported to the Board of Directors, and audited. When Total Risk Control was first introduced, the framework was simple for mainly covering marine transport market risk and vessel sales market risk. Subsequent revisions have broadened the scope of the framework to include country risk, customer credit risk, and Group company business risk, for a more appropriate measurement of risk exposure.
- Total Risk Control and Consistent Standards for New Investment Decisions
When Total Risk Control was first rolled out, it was not directly linked to the profitability benchmarks that the Company uses to make new investment decisions. Through subsequent revisions, the framework was improved in a way the funding costs in profitability assessments vary depending on the size of risk exposure, which is calculated based on the concepts of the Total Risk Control.
In other words, internal evaluations of ship investment projects now take into consideration the maximum potential loss in line with the amount of risk associated with the ship and applies equity cost for this portion, while debt cost is applied in the risk-free portion. In this way, the higher the risk in a ship, the higher the funding cost associated with it, and the investment will not be approved unless profitability are sufficiently high to commensurate with this risk. Based on this approach, investment projects that consume a large amount of Companywide investment leeway (remaining amount of risks that can be added) face high hurdle rates, and projects that require fewer resources face lower hurdles to approval. The framework ultimately leads to an overall portfolio that balances risks against returns.