Risk Management
Fluctuations of Cargo Volume, Fleet Supply and Freight Rates
The global shipping business, like many other industries, is greatly affected by macroeconomic risks such as global economic cycle, as well as industry specific risks. MOL’s profit and loss is exposed to multitude of factors, such as fluctuations in the economies of individual countries, changes in trade structures, vessel supply-demand balance, market conditions and cargo volumes variation. MOL has adopted a strategy of "dispersing business segments to reduce risks" and "accumulating stable profits" by aligning its fleet to match global shipping demands with a focus on raw materials and finished goods sector. In this way, we strive to maximize returns and sustain growing profit.
In accordance with our internal market risk management regulations, we adequately reduce risks related to fluctuation, especially those arising from market exposure, bunker prices, exchange rates, and interest rates. Material issues such as vessel investment are handled by Investment and Finance Committee, where risks are identified, analyzed and evaluated.
Reducing Risks Through Dispersing Business Segments
MOL, as a "full-line marine transport group," operates around 820 vessels as of the end of March 2020, ranging from dry bulkers, tankers, LNG carriers, car carriers to containerships, capable of transporting a wide variety of raw materials and finished goods. Different types of vessels and cargos 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 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 assessing whether a particular vessel type is in a market consisting of medium- to long-term contracts or how much market exposure the Company can tolerate, which enables the Company to pursue higher profits while mitigating risks.
Variation of Procurement and Contract terms
(as of March 2020)
■Owned or mid-and long-term chartered vessels with mind-and long-term contracts
■Owned or mid-and long-term chartered vessels with short-term contracts
■Short-term chartered vessels with short-term contracts
Market Exposure Ratio by Vessel type (Consolidated, by no. of vessels)
(as of March 2020)
| Total number of Fleet | Market Exposure Ratio | |
|---|---|---|
| Capesize | 84 | 39% |
| Mid-and small-size bulkers | 98 | 6% |
| VLCC | 33 | 24% |
| Product Tanker | 22 | 50% |
| LPG Tanker | 9 | 56% |
Market Exposure
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.)
Accumulating Stable Profits Through Medium- and Long-Term Contracts
MOL has numerous medium- and long-term contracts based on long-standing trust and relationships with customers, which ensure stable future cash inflow. This way, the Company reduces the market variable risks on corporate performance . While there may be a periodical short downturn, we believe global marine transportation will continue to expand in time. However, considering the current glut of shipbuilding capacity, more time will likely be required before the market structure takes a favorable turn. MOL aims to accumulate earnings by securing and expanding medium- and long-term contracts that are less subject to fluctuating market and can produce a stable profit. To achieve this objective, we are open to consider options such as M&A deals in growing sectors.
Exchange Rate Fluctuations
Although MOL has shipping contracts on Japanese yen-denominated basis with some Japanese clients, general transactions in the global shipping business are done on U.S. dollar-denominated basis. While we endeavor to incur expenses in U.S. dollars, U.S. dollar-denominated revenue currently exceeds U.S. dollar-denominated expenses. Therefore, stronger Japanese yen against the U.S. dollar can have a considerable impact on MOL Group earnings. We flexibly hedge foreign exchange risks to limit profit sensitivity.
Interest Rate Fluctuations
MOL depends mainly on bank loans and corporate bonds for the working capital and capital expenditures. Loans are mainly denominated in either Japanese yen or U.S. dollars. While funds that are procured with variable interest rates are affected by interest rate fluctuations, we lock in some of such variable interests by using interest rate swap, so as to mitigate the impact of possible rise in interest rates in the future. Although MOL has benefited from ultra-low interest rates after the 2008 financial crisis, we are taking steps to suppress the risk of a future interest rate raise by flexibly adjusting the ratio of variable- and fixed-rate loans, closely monitoring the latest financial market conditions.
Bunker Price Fluctuations
The bunker market price is generally linked to the crude oil market price. Since bunker costs share a large portion of operation costs, any increase in bunker prices used to have a considerable impact on earnings for the MOL Group. However, currently most medium- to long-term contracts contain bunker price surcharge clauses that pass on the risk of bunker price fluctuations to customers. For short-term agreements, we reflect the bunker prices at the time in freight rates or employ a formula to adjust freight rates in line with bunker prices. Even for the remaining limited exposure, we work to reduce the risk amount by using bunker forward trading. With these countermeasures, change in profit and loss coming from the bunker price fluctuations has now become limited.
Safety and Operational Risk for Vessels
MOL operates a fleet of approximately 820 vessels and cannot ignore the risks of sudden unexpected marine accidents. In order to prevent such accidents, we have introduced a variety of measures such as establishing safety standards, a solid safety management structure, comprehensive crew training system, and the Safety Operation Supporting Center.
Additionally, various types of insurance are arranged to provide sufficient funding for any compensation that may be necessary to prevent a major impact on our financial results if we or a related party suffer damages in the unlikely event of an MOL owned vessel being involved in a collision, sinking, fire or other marine incident.
Group Company Operational Management
Each Group company submits required reports to MOL in a timely manner in accordance with Group Company Management Regulations. MOL properly ascertains the financial conditions and business risks of Group companies and as a shareholder, requests them to obtain permission prior to executing important management matters.
Natural Disaster or Similar Event
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 a disaster or similar event to ensure the safety of its vessels and personnel as a top priority and continue providing core ocean transport services or quickly restore 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. MOL has also been conducting regular disaster drills at the Head Office or outside, and by addressing issues that arise from these drills, continues improving the effectiveness.