Risk Management
Fluctuations of Cargo Volume, Fleet Supply and Freight Rates
The global shipping business, like many other industries, is greatly affected by trends in the global economic cycle, and is thus subject to both macroeconomic risk, as well as business risk associated with trends in specific industries. There are a multitude of factors that are subject to change, such as fluctuations in the economies of individual countries, changes in trade structures, vessel supply-demand balance, market conditions and cargo volumes. Achieving the best performance hinges on objectively analyzing information so as to continually increase the probability of generating higher earnings. With this in mind, MOL has adopted a strategy of "diversifying operations to reduce risk" and "raising highly stable profits" by aligning its fleet to match international marine transport demand in the transport of both raw materials and finished goods. In this way, we strive to maximize returns and sustain profit growth.
In accordance with our internal market risk management regulations, we appropriately reduce risks related to fluctuation, especially those arising from freight rates, bunker prices, exchange rates, and interest rates. The Investment and Finance Committee also identifies, analyzes and evaluates risks related to such material issues as investment in ships.
Diversifying Operations to Reduce Risk
MOL operates a "full-line marine transport group." As of the end of March 2019, we operated around 840 vessels, ranging from dry bulkers, tankers, and LNG carriers to car carriers and containerships, capable of transporting a diverse range of raw materials and finished goods. Each type of ship and each type of cargo have particular supply and demand trends, and create particular markets. While some of these markets are highly correlated with each other, others are negatively correlated depending mainly on the economic environment, so the impact in one sector offsets the impact in another. By assessing the suitability of a particular vessel type for medium- to long-term contracts and market exposure the Company expects, MOL constructs an optimum business portfolio, which allows the Company to pursue higher profits while mitigating risks.
Variation of Procurement and Contract terams
(as of March 2019)
■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 % by Vessel type
(as of March 2019)
| Total number of Fleet | Market Exposure | |
|---|---|---|
| Capesize | 94 | 21% |
| Mid-and small-size bulkers | 103 | 9% |
| VLCC | 34 | 21% |
| Product Tanker | 21 | 81% |
| LPG Tanker | 8 | 13% |
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.)
Building up Highly Stable Profits Through the Use of Medium- and Long-Term Contracts and Other Means
The Company pursues medium- and long-term contracts won based on long-standing relationships of trust with customers. These contracts ensure a stable future cash flow that will help reduce the risk that market fluctuations could have on its results. International marine transportation is expanding, but considering the ongoing glut of shipbuilding capacity, more time will likely need to elapse before a structural turnaround is realized in the market environment. The Company aims to conclude contracts that are not largely affected by changes in the external business environment and constitute a stable source of profit. By expanding these contracts from a long-term perspective, MOL will create an even steadier earnings structure. To achieve this objective, one of the options we will look closely at as a matter of priority is M&A deals in growing sectors which enjoy a relatively stable cash flow.
Exchange Rate Fluctuations
Although MOL has concluded transport contracts on a yen-denominated basis with some Japanese clients, most transactions in the international marine transport business are concluded on a U.S. dollar-denominated basis. Despite our best efforts to incur expenses in U.S. dollars, U.S. dollar-denominated revenue currently exceeds U.S. dollar-denominated expenses, so when the yen strengthens against the U.S. dollar this can have a negative impact on Group earnings. In fiscal 2019, we project that each JPY1-per-dollar change in the yen-U.S. dollar exchange rate will have an impact of approximately JPY0.9 billion on consolidated ordinary income.
Interest Rate Fluctuations
MOL depends mainly on the issuance of corporate bonds and funds borrowed from banks and other financial institutions to meet working capital and capital expenditure requirements. Loans are denominated in either yen or U.S. dollars, with funds procured at variable interest rates affected by interest rate fluctuations. As of March 31, 2019, interest-bearing debt totaled JPY1,1058.0 billion, and around 30% of that loan principal is locked in at a fixed interest rate. As a result, an increase of 1 percentage point in market interest rates on both yen-denominated and U.S. dollar-denominated interest-bearing liabilities would impact annual consolidated ordinary profit by no larger than approximately JPY4.0 billion. Although MOL has benefited from ultra-low interest rates in the aftermath of the financial crisis, the Company is taking steps to mitigate the risk of a future interest rate rise. It plans to flexibly adjust the ratio of variable- and fixed-rate loans through interest rate swaps and other means according to changes in financial conditions, taking into consideration the balance between variable- and fixed-rate interest.
Bunker Price Fluctuations
The market price of bunker is generally linked to the price of crude oil, and any increase in bunker prices has a negative impact on earnings for the MOL Group. In fiscal 2019, MOL projects buying 4.1 million tons of fuel on a standalone and consolidated subsidiary basis, of which the Company is able to pass on about 80% of the bunker price fluctuation risk to customers.
In addition, an increase of US$1 per metric ton in the average annual price of bunker would lower our consolidated ordinary profits/losses, including from equity-method affiliates, by approximately 0.19 billion yen (net of hedging) at the maximum. Meanwhile, a stricter regulatory rule to reduce SOx emissions generated by ships was introduced in January 2020. This regulation requires the use of low-sulfur fuel oil containing less than 0.5% sulfur, the installation of SOx scrubbers on vessels to remove sulfur, or the use of alternative fuels such as LNG, LPG, and methanol, which have an impact on fuel costs or capital costs. The Company intends to put in effort to gain the understanding of customers and reflect these additional costs in freight rates and other fees.
Vessel Operations
MOL operates a fleet of approximately 840 vessels and it is therefore impossible to ignore the risks related to various incidents that may occur on the high seas. In order to prevent accidents, the Company has introduced a variety of measures such as safety standards, a safety management system, comprehensive crew education and training, and establishment of organizations to support safe operations.
Furthermore, MOL has arranged sufficient insurance coverage so that its financial results will not be materially impacted, should the Company or a third party suffer damages in the unlikely event of an MOL-operated vessel being involved in a collision, sinking, fire or other marine incident.
Group Company Operational Management
The MOL Group Corporate Principles serve as the basis for setting regulations at MOL Group companies. Each Group company submits required reports to MOL in a timely manner in accordance with Group Company Management Regulations. After properly ascertaining the financial conditions and business risks, the Company, as a shareholder, requests Group companies 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 puts the highest priority on ensuring the safety of its vessels and personnel in the event of a disaster or similar event. The Company has formulated a business continuity plan documenting procedures to enable it to continue providing core ocean transport services and quickly restore operations in the unlikely event that they are suspended. This business continuity plan establishes organizations and delegates authority for duties relating to maintaining the safe operation of vessels, execution of transportation contracts and charter agreements, financial preparation, securing required personnel, and other matters. Furthermore, for some years MOL has been conducting regular disaster-preparedness drills on and off premise at Head Office, aboard ships and throughout the Group's other facilities, as well as taking other measures to ensure preparedness. By addressing issues arising from these drills, MOL believes that it maintains a high state of readiness. Nevertheless, in the event of a disaster or similar event in which MOL cannot completely avoid damage, the Company's business performance may be affected.